England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
THE HON MR JUSTICE LIGHTMAN
CO/5240/2003

		Royal Courts of Justice Strand, London, WC2A 2LL
		30/07/2004

Lord Justice Ward:

1. I invite Jacob LJ to give the first judgment.

Lord Justice Jacob:

Introduction

2. This is an application for permission to appeal and, if permission be granted an appeal, from a decision of Lightman J of 18^th February 2004 [2004] EWHC 254 (Admin). The appellants are the Commissioners of Customs and Excise and HM Attorney General (collectively "CCE"). The respondents are the Federation of Technical Industries and 53 traders in mobile telephones and computer processing units. The Federation is their trade body. I shall call the respondents collectively "The Federation".
3. By these proceedings the Federation challenges the legitimacy of certain provisions of the Value Added Tax Act 1994 as amended. The attack before Lightman J was launched on a broad front, alleging both violation of EU law and incompatibility with the ECHR and its first protocol. Six different arguments were raised on the application for permission to proceed with the claim.
4. Pursuant to an earlier order the application for permission was made on notice to the CCE. So the substantial arguments took place at the permission stage. The Judge rejected five of the six arguments at that point. We do not have to deal with them for there is no attempt to appeal his refusal of permission. As regards the remaining point, the Judge held that permission to proceed with the application for judicial review should be granted. Having regard to the fact that he thought the position under EU law was uncertain he therefore immediately ordered a reference to the ECJ.
5. In the skeleton arguments before this court there was some misunderstanding as to what the precise procedural position was. Some argument was directed to the question of whether an appeal could lie from a decision to grant permission to proceed with an application for judicial review. But in the end it was agreed that this debate was irrelevant. The CCE are not now seeking to appeal the Judge's grant of permission to proceed; they are seeking to appeal his decision (to refer questions to the ECJ) in the proceedings for which he has granted permission to proceed. The fact that he gave his reasons as to why there should be a reference at the permission stage is simply an irrelevance.
6. There is no doubt that the case raises important questions, legally and financially. So in the ordinary way this Court would (unless that matter is despite its importance very plain) grant permission to appeal. However the Federation raised two preliminary reasons as to why permission should be refused. The first was a particularly meritless time point, based on the fact that although the appropriate documents were filed in time they were filed in the wrong office in this building and it took a little while for this to be sorted out. The Federation suffered no prejudice. Under some pressure from the Court the time objection was dropped.

Jurisdiction of the Court

7. The second objection was one of law. It was submitted by Maître Waelbroeck for the Federation that this Court had no jurisdiction to decide whether the Judge was right or wrong to refer. He submitted that it was a principle of EU law that a higher court could not interfere with a decision of a lower court to refer under Art. 234 (formerly 177) of the EC Treaty, even where the higher court was of the opinion that a reference was not necessary because the point of European law was clear beyond argument (acte clair).
8. He based his submission on Rheinmühlen-Düsseldorf v Einfuhr und Vorratsstele Getreide Case 166/73 [1974] ECR 33. In paragraph 4 of its judgment the Court said:

"It follows from these factors that a rule of national law whereby a court is bound on points of law by the rulings of a superior court cannot deprive the inferior courts of their power to refer to the Court questions of interpretation of Community law involving such rulings.

It would be otherwise if the questions put by the inferior court were substantially the same as questions already put by the superior court.

On the other hand the inferior court must be free, if it considers that the ruling on law made by the superior court could lead it to give a judgment contrary to Community law, to refer to the Court questions which concern it.

If inferior courts were bound without being able to refer matters to the Court, the jurisdiction of the latter to give preliminary rulings and the application of Community law at all levels of the judicial systems of the Member States would be compromised."

9. But there was a second Rheinmühlen case, 146/73 [1974] ECR 139. Paragraph 3 of the judgment said this:

"According to [Rheinmühlen 1] a rule of national law whereby a court is bound on points of law by the rulings of a superior court cannot on this ground alone deprive the inferior courts of their power, provided for under Article 177, to refer questions to the Court for a preliminary ruling.

However, in the case of a court against whose decisions there is a judicial remedy under national law, Article 177 does not preclude a decision of such a court referring a question to this Court for a preliminary ruling from remaining subject to the remedies normally available under national law."

10. I read this last paragraph as saying that a national court of appeal can consider whether a court below was right to refer. That is what we are being asked to do here – exercise the remedy of appeal normally available in our courts.
11. Moreover both these judgments were before our Court of Appeal in Bulmer v Bollinger [1974] 1 Ch 401 in the form reported in the CMLR (where they are reported together). Lord Denning MR said:

"The European court take the view that the trial judge has a complete discretion to refer or not to refer: see Rheinmühlen-Dusseldorf (Firma) v Einfuhr und Vorratsstelle für Getreide und Futtermittel [1974] 1 C.M.L.R. 523 – with which they cannot interfere: see Milchwerke Heinz Wohrmann & Sohn K.G. v Commission of the European Economic Community [1963] C.M.L.R. 152. If a party wishes to challenge the decision of the trial judge in England – to refer or not to refer – he must appeal to the Court of Appeal in England."

12. Stephenson LJ (with whom Stamp LJ agreed) said (p.431):

"I find it hard to follow the argument that a rule which gives a right of appeal to a party dissatisfied with a judge's exercise of his discretion one way restricts in some manner the judge's power to exercise it. It may facilitate appeals against one way of exercising it; it does nothing thereby to prevent its exercise either way. The judge is left as free to exercise this discretion as any judicial discretion and this court has its customary freedom to correct its exercise if unjudicial, unjust or wrong."

13. So all members of this Court held, having seen both Rheinmühlen cases, that an appeal lay to this Court from a judge's decision about a reference, whether that decision was to refer or not refer. Since then, in at least one case, this Court has reversed a decision to refer – see R v Stock Exchange ex parte Else [1993] QB 534. It held that, contrary to the view of the first instance judge, the point at issue was acte clair. All concerned assumed that in those circumstances the decision to refer could be reversed.
14. Maître Waelbroeck and Mr Andrew Young contended that even if we thought the point was acte clair the Rheinmühlen cases meant that it would nonetheless be open later for to a first instance judge to disagree and to refer, producing a sort of ping-pong between this court and that of first instance. I understand the fear expressed by the ECJ in Rheinmühlen, that important questions of EU law might, by virtue of the acte clair rule, be kept away from the ECJ by a determined national final court of appeal. But this case is miles away from that sort of problem. If the Court of Appeal is of the opinion that a matter is acte clair, I doubt very much whether a first instance judge would subsequently take a different view. As Mr Young eventually accepted, the problem has not begun to arise in this case. So I say no more about it.
15. In the result, as we indicated during the hearing, this Court has jurisdiction to decide whether or not the Judge was right to refer, the time for seeking permission to appeal was extended and permission to appeal was granted.

The problem the impugned provisions are designed to tackle

16. There is no dispute about the existence of the problem or its details. The Federation do not deny (indeed it could not) that it is a major abuse of the VAT system. It arises from the fact that under the rules for the Single Market introduced in 1993 supplies of goods between registered traders in different Member States are free of VAT provided that the seller obtains the VAT registration number of the customer in the other Member State and can prove that the goods were removed from the seller's own Member State into another Member State. Purchases of goods from another Member State (acquisitions) into the United Kingdom give rise to an obligation on the purchaser to account in the United Kingdom for "acquisition" output tax. The purchaser can recover this tax as "acquisition input tax" on his own VAT return in the UK.
17. The simplest form of abuse is what the CCE call "acquisition fraud". A business in the UK acquires goods from an EU supplier VAT free and sells them on into the United Kingdom market directly or indirectly. When it sells these goods to its UK customers it charges VAT but it fails to account to the CCE for the VAT it collects. Before the CCE catch up with it the trader simply disappears.
18. This kind of abuse is somewhat limited in that the importer who intends to defraud is actually selling the goods into the United Kingdom market. He has to find real customers or his customers do.
19. Much more significant is the second type of abuse which the CCE call "carousel fraud". Again, there is a UK importer buying from a supplier in another EU state. Again, he pays no VAT on his purchase. He then sells to a "customer" in the UK, charging VAT. That "customer" sells on to another "customer", himself charging VAT (output tax) and setting that against the tax he paid to his supplier (input tax). This may go through several traders (whom CCE call "buffers"). The last buffer in the chain does not, however sell on to ultimate UK customers. He sells back into the EU, very often to the original seller. He will have paid input tax on his purchase. This he claims "back" from CCE. None of this would matter if the original importer, who has charged output tax to the first of the buffers, were around to account to the CCE for that tax. But by now he has disappeared.
20. So on each circuit of the "carousel" 17.5% of the value of the goods is extracted from the CCE. The scheme requires high value low physical size goods – a containerful of mobile phones or computer chips is just right for this. A pallet-load arrives at Heathrow, the transactions all take place quickly (perhaps in the same day) and the pallet moves out again.
21. The CCE estimate (the Federation do not accept) that the annual cost to the UK in 2002-03 was between £1.65 and £2.64 billion. The problem is, whatever the precise figure, vast. It is not confined to the UK but is EU wide. Mr Peacock QC for the CCE told us that no less than 13 member states had adopted legislation of the sort sought to be impugned in this case. The details of this varied from country to country, but all depended on the power to make it invoked here.

The impugned legislation

22. This consists of provisions (ss. 17 and 18) of the Finance Act 2003 amending the UK VAT Act 1994. Section 17 amends para. 4 of Schedule 11 of the 1994 Act creating what is conveniently called "the security provision". Section 18 adds a new section, s.77A, creating the "joint and several liability" provision.
23. For brevity I do not set out the detailed wording of these provisions. It is to be found in paras. 3 and 4 of Lightman J's judgment. It is sufficient to lift (with gratitude) almost verbatim the uncontroversial summary of how they work provided in Mr Peacock's skeleton argument.
24. The Security Provision

"i. if they think it necessary for the protection of the revenue, the CCE may require a taxable person, as a condition of his supplying or being supplied with goods or services under a taxable supply, to give security for the payment of any VAT which is, or may become, due from any person to whom 'relevant' goods or services are supplied. 'Relevant' goods or services means goods or services supplied by or to the taxable person. The security shall be of such amount and shall be given in such manner as the CCE may determine;

ii. if an appeal is made against the requirement to give security, then the Tribunal shall allow the appeal unless the CCE satisfy the Tribunal that: there has been an evasion of, or an attempt to evade, VAT in relation to goods or services supplied by or to that person; or, it is likely (or without the requirement for security it is likely) that VAT in relation to such goods or services will be evaded;

iii. if the CCE do so satisfy the Tribunal, then the Tribunal will consider the requirement to give security in the same manner as they would consider a request for security from a taxable person in respect of that person's current or future VAT debts. The approach which a Tribunal should follow on such an appeal was considered by the Court of Appeal in John Dee v CCE [1995] STC 941 at pps.952-3. The Court held that such an appeal was appellate in nature as opposed to supervisory. The statutory condition which the Tribunal must consider on such an appeal is whether it appeared requisite to the CCE to require security. In considering this, the Tribunal should consider whether the CCE acted in a way in which no reasonable panel of CCE could have acted or whether they had taken into account some irrelevant matter or had disregarded something to which they should have given weight. The Tribunal may also have to consider whether the CCE have erred in point of law."

The Joint and Several Provision

25. i. The power to make one person jointly and severally liable with another is exercisable where:

a. a supply to which the section applies has been made to a taxable person; and;

b. the taxable person knew or had reasonable grounds to suspect that VAT would be unpaid.

If these conditions are satisfied the CCE may serve a notice on the taxpayer specifying the amount of VAT so payable that is unpaid.

ii. there is a rebuttable presumption that the taxable person had such reasonable grounds where it is established that the price payable for the goods was lower than the reasonable open market price or less than the price payable on a previous supply of those goods – the burden of showing this on the CCE;

iii. the presumption may be rebutted by adducing evidence as to the circumstances in which the ostensibly 'low' price was payable by the taxpayer and by showing that the low price was due to circumstances unconnected with the failure to pay VAT;

iv. once an appeal is lodged, the CCE must satisfy the VAT and Duties Tribunal as to the taxable person's actual knowledge or as to there being reasonable grounds for the taxable person to suspect. The CCE must also, whether they rely on the presumption or not, satisfy the Tribunal that VAT which was payable has not been paid. Only if this is so will the Tribunal go on to consider any other evidence adduced by the taxable person."

The Source of the Power to make these provisions

26. CCE claim that the VAT 6^th Directive (77/388/EEC, as amended by 2000/65/EC), expressly confers the power on Member States to enact provisions of the kind impugned. As a fallback position they also would argue that such provisions may be enacted because they are not expressly forbidden by the Directive. Mr Peacock recognises this latter argument faces an arguable difficulty: since the Directive expressly does confer powers to render persons taxable, by implication there is no other power than that contained in it. Because the point is arguable it cannot be said to be acte clair. Accordingly, though he reserves the right to run the fallback point in the ECJ if necessary, he does not do so before us. Before us the question is whether the Directive so clearly confers a power to create the Security and Joint and Several Provisions that it is acte clair – no reference then being necessary.
27. Before the Judge, and initially before us, Mr Peacock invoked Art 21.3 alternatively Art. 22(8) of the Directive as the source of the power to make the joint and several provision, and Art. 22(8) as source of the power to make the security provision. As matters developed, however, it became clear that if Art.21.3 did not confer the power to make the joint and several provision, then it could not be acte clair that Art.22(8) did so. Likewise Art.22(8) (said to be the source of the power to make the security provision) could not unarguably have sufficient width to justify that provision unless Art. 21.3 conferred the power to create joint and several liability. Mr Peacock accepted that if there was no power to create joint and several liability, then it was at least arguable that there was no power to achieve much the same end by making one taxpayer give security for the tax due from others. In short he accepted that if his Art 21.3 point was not acte clair, then his Art. 22(8) point could not be either. So we do not have to consider the Art.22(8) point.
28. I therefore turn to set out the whole of Article 21 of the 6th Directive as amended and in force at the time of enactment of the impugned provisions.

"Persons liable for payment for tax

1 Under the internal system, the following shall be liable to pay value added tax—

(a) the taxable person carrying out the taxable supply of goods or of services, except for the cases referred to in (b) and (c).

Where the taxable supply of goods or of services is effected by a taxable person who is not established within the territory of the country, Member States may, under conditions determined by them, lay down that the person liable to pay tax is the person for whom the taxable supply of goods or of services is carried out;

(b) taxable persons to whom services covered by Article 9(2)(e) are supplied or persons who are identified for value added tax purposes within the territory of the country to whom service covered by Article 28b(C), (D), (E) and (F) are supplied, if the services are carried out by a taxable person not established within the territory of the country;

(c) the person who to whom the supply of goods is made when the following conditions are met—

—the taxable operation is a supply of goods made under the conditions laid down in Article 28c(E)(3),

—the person to whom the supply of goods is made is another taxable person or a non-taxable legal person identified for the purposes of value added tax within the territory of the country,

—invoice issued by the taxable person not established within the territory of the country conforms to Article 22(3).

However, Member States may provide a derogation from this obligation, where the taxable person who is not established within the territory of the country has appointed a tax representative in that country;

(d) any person who mentions the value added tax on an invoice or other document serving as an invoice;

(e) any person effecting a taxable intra-Community acquisition of goods. "

2 By way of derogation from the provisions of paragraph 1—

(a) where the person liable to pay tax in accordance with the provisions of paragraph 1 is a taxable person who is not established within the territory of the country, Member States may allow him to appoint a tax representative as the person liable to pay tax. This option shall be subject to conditions laid down by each Member State;

(b) where the taxable transaction is effected by a taxable person who is not established within the territory of the country and no legal instrument exists, with the country in which that taxable person is established or has his seat relating to mutual assistance similar in scope to that laid down by Directives 76/308/EEC and 77/799/EEC and by Council Regulation (EEC) No 218/92 of 27 January 1992 on administrative co-operation in the field of indirect taxation (VAT), Member States may take steps to provide that the person liable for payment of the tax shall be a tax representative appointed by the non-established taxable person.

3 In the situations referred to in paragraphs 1 and 2, Member States may provide that someone other than the person liable for payment of the tax shall be held jointly and severally liable for payment of the tax.

4 On importation, value added tax shall be payable by the person or persons designated or accepted as being liable by the Member State into which the goods are imported."

29. The key provision is Art. 21.3. CCE say it confers on Member States the right to make any other plan jointly and severally liable along with any other person mentioned as liable in paras 1 and 2 liable. CCE accept that there are limitations on the power. But these are not as to any kind or class of individual. They are those imposed by general Community law, namely that the exercise of the power must be objectively justifiable, rational, proportionate and legally certain ("general principles"). So if there were legislation which made A taxable jointly and severally with B for no rational reason it would be invalid: a bookseller in Bath jointly and severally liable with a plumber in Plymouth is the sort of thing, though there could obviously be less extreme examples. Provided the legislation complies with general principles, then A and B can be made jointly and severally liable for A's tax or B's tax or both.
30. Specifically Mr Peacock submitted that was the case here – the whole and only point of the legislation was to prevent abuse and to remove difficulties in the collection of tax caused by the fact that cross-border imports were involved. He relied upon Lightman J's unappealed finding (para. 33) that the legislation is proportionate. Before us, Maître Waelbroeck accepted that if Art.21.3 conferred the power to create joint and several liability, then it did so in a manner complying with general principles.
31. It follows from this that it is common ground that the question before us (acte clair or not) turns solely on the meaning of Art.21.3. Does it confer a general power to enact laws creating joint and several liability subject only to the general principles, or is the class of person who can be made so liable limited?

CCE's Arguments

32. Mr Peacock starts with the plain words of the provision. He says Art.21.3 plainly and clearly says that someone other than the taxpayer may be made liable provided only that it is in "one of the situations referred to in paras. 1 and 2." Thus only the situation in para. 4 (person liable on importation because designated by Member State as being liable) is excluded from the power).
33. That argument is reinforced by the general words of the 9^th recital to the amending Directive (2000/65/EC):

"(9) Member States may continue to provide that someone other than the person liable for payment of the tax shall be held jointly and severally liable for payment of the tax".

34. Next Mr Peacock says that the literal words are reinforced by the legislative history of the provision. The original, unamended, 6^th Directive in 1977 (77/388/EEC) had a much shorter Art.21. It read:

"Article 21

Persons liable to pay tax to the authorities

The following shall be liable to pay value added tax:

1. under the internal system:

(a) taxable persons who carry out taxable transactions other than those referred to in Article 9(2) (e) and carried out by a taxable person resident abroad. When the taxable transaction is effected by a taxable person resident abroad Member States may adopt arrangements whereby tax is payable by someone other than the taxable person residing abroad. Inter alia a tax representative or other person for whom the taxable transaction is carried out may be designated as such other person. The Member States may also provide that someone other than the taxable person shall be held jointly and severally liable for payment of the tax;

(b) persons to whom services covered by Article 9(2) (e) are supplied and carried out by a taxable person resident abroad. However, Member States may require that the supplier of services shall be held jointly and severally liable for payment of the tax;

(c) any person who mentions the value added tax on an invoice or other document serving as invoice;

2. on importation; the person or persons designated or accepted as being liable by the Member States into which the goods are imported."

35. So in 1977 the joint and several power was in (a). A more limited joint and several power (because not in respect of "any person" but only the supplier of services) was in (b). There was no joint and several power in relation to (c).
36. Art 21 was elaborated and varied by a series of amending Directives, namely:

91/680/EEC

92/111/EEC

95/7/EC

1999/59/EC

2000/65/EC

37. What matters is that until the last version, whenever an addition or amendment was made (whether by simple insertion of a new kind of case or by amendment of an existing case) the new insertion or provision had, added at its conclusion, a joint and several provision.
38. This can be illustrated by looking at the amendments made for the coming into force of the Single Market. This was that contained in Directive 92/111/EEC. This provided that:

"Article 21(1)(a) shall be replaced by the following:

(a) the taxable person carrying out the taxable supply of goods or services, other than one of the suppliers of services referred to in (b).

Where the taxable supply of goods or of services is effected by a taxable person who is not established within the territory of the country, Member States, may adopt arrangements whereby tax is payable by another person. Inter alios a tax representative or the person for whom the taxable supply of goods or of services is carried out may be designated as that other person.

However, the tax is payable by the person to whom the supply of goods is made when the following conditions are met:

- the taxable operation is a supply of goods made under the conditions laid down in paragraph 3 of Title E of Article 28c,

- the person to whom the supply of goods is made is another taxable person or a non-taxable legal person identified for the purposes of value-added tax within the territory of the country,

- the invoice issued by the taxable person not established within the territory of the country conforms to Article 22(3).

However, Member States may provide a derogation from this obligation in the case where the taxable person who is not established within the territory of the country has appointed a tax representative in that country.

Member States may provide that someone other than the taxable person shall be held jointly and severally liable for payment of the tax:

Article 21(1)(b) shall be replaced by the following:

(b) Persons to whom services covered by Article 9(2)(e) are supplied, or persons, identified for value added tax purposes within the territory of the country, to whom services referred to in Article 28b(C)(D) or (E) are supplied, when the service is carried out by a taxable person established abroad; however, Member States may require that the supplier of the service shall be held jointly and severally liable for payment of the tax."

For convenience I have emboldened the joint and several powers. [A commercial reprint of this version of Art.21 before us showed the joint and several provision in Art.21(1)(a) further indented. A mini-argument revolved round this, but to no point since the text is not so indented in the Official Journal version.]

39. It will be seen that both (a) and (b) contain a joint and several provision, (a) quite general but (b) limited to the supplier of the service.
40. The 1995 and 1999 versions substituted new versions of Art. 21(1)(b). They are not material to either side's argument. But the 2000 amendment was more drastic. It removed all separate references to the joint and several power from (a) and (b) and inserted the general provision in the new Art.21(3). Clearly added is the power to create joint and several liability in respect of class 1(d) (person who mentioned VAT on an invoice). That did not exist before. Equally clearly widened is the power under (b) – no longer limited to the supplier of the service. So recital (9) (saying Member States may continue to provide for joint and several liability) does not preclude the Directive conferring these extra powers.
41. Mr Peacock submits that what happened was the draftsman was simply picking up the various references to the power to create joint and several liability and lumping them together. He submits that the power was always there, right from the outset in 1977.
42. Clearly that cannot be quite right – as I have just pointed out there has been a clear enlargement in at least two respects. That enlargement does not in any way alter the thrust of his argument – indeed enlarging the power in the respects I have mentioned reinforces his arguments that the power is to construed quite generally, subject only to the general principles.
43. Thus according to Mr Peacock the legislative history clearly supports his case that the position is acte clair: the power was in the original 1977 version and has been carried through in successive versions, the last version sweeping it up generally in Art. 21.3.
44. Mr Peacock finally submits that the travaux preparatoires are equally clear on the point. For this purpose he took us to various documents concerning the making of the 2000 amendment – not the travaux for the 1977 version itself. He submits that by the time of the making of the 2000 amendment it is clear that all concerned thought the power was and ought to be general.
45. I therefore turn to examine the travaux. The key documents are Commission Proposal for amendment of 77/388/EEC dated 27.11.1998 (COM(1998) final), ("the Proposal"), and the Opinion of the Economic and Social Committee ("ESC") constituted under Art.99 of the EC Treaty ("the Opinion").
46. Under the general heading "Determination of the person liable for payment of the tax under the present system" the Proposal says:

"According to the principle set out in Art.21 of the Sixth VAT Directive, the trader who carries out taxable transaction in a given country is himself the person liable to pay tax to the authorities."

It then refers to "two important exceptions" (triangular transactions and certain supplies of services, e.g. of lawyers) before restating the principle, and adding that it applies whether or not the person who carries out the transactions is established in within the territory of the country concerned.

After describing problems which may arise when the trader is not established in the state of the transaction and the power given to deal with the problems by the appointment of a tax representative, the Proposal says:

"Article 21 also permits Member States to provide that someone other than the person liable for payment of the tax is held jointly and severally liable for payment of the tax."

47. Mr Peacock points to that. He says it is a free-standing paragraph clearly showing that the Commission thought the power to create joint and several liability was not limited to particular classes of case.
48. Under the same heading the Proposal goes on to include the following passage:

"The general principle the Commission wished [in a 1994 report to the Council] to see adopted in Member States was that the person liable for payment of the tax should be the taxable person (whether or not he is established) and that there should be as few exceptions (tax representative or person for whom the supply is intended as possible to this rule."

49. The Proposal then comes to the heading "the Proposed Amendments". It says, so far as is relevant here:

"…. the present proposal for a Directive supports the idea that there should be only one person liable for payment per type of transaction, irrespective of the Member State in which that transaction was carried out "

"Member States also still have the option of designating a person other than the person liable for payment of the tax as jointly and severally liable for payment of the tax. The only change is a statement to the effect that this option must not give rise to provisions which create a disadvantage specifically for non-established taxable persons".

50. If one goes to the annexed draft Directive one can see what this last sentence is about. The Commission were suggesting a form of Art 21.1 which ended with a paragraph reading:

"Member States may provide that someone other than the person liable for payment of the tax shall be held jointly and severally liable for payment of the tax, provided this option is applied without discrimination against non-established taxable persons."

51. In the event the proposed rider was not adopted and the provision was not included at the end of Art.21.1 – it formed a separate Art.21.3. This, submitted Mr Peacock, shows it is quite clear that the Commission thought there was a general existing general power to create joint and several liability. Moreover the fact that a qualification to that power was considered at all (albeit not adopted) shows that the general power was specifically under consideration.
52. I turn to the Opinion of the ESC. Under the Introduction is the following paragraph:

"1.5 Art. 21 also permits Member States to provide that someone other than the person liable for payment of the tax is held jointly and severally liable for payment of the tax."

53. Under the heading "The Commission's proposals" is:

"2.1 The present proposal for a Directive supports the idea that there should be only one person liable for payment per type of transaction, irrespective of the Member State in which the transaction is carried out."

"2.2.2 However, there are exceptions to this general rule: [these are then set out].

"2.2.2 In addition Member States would still have the option of designating a person other than the person liable for payment of tax as jointly and severally liable for payment of tax. The only change is a statement to the effect that this option must not give rise to provisions which create a disadvantage specifically for non-established taxable persons"

54. Under the heading "General Comments" is the following:

"3.4 The ESC accepts the proposition that the taxable person who carried out a taxable transaction should logically assume the liability for payment of the tax. It considers that ideally, there should be as few exceptions as possible to this general rule."

55. Under "Specific Comments" is this:

"4.4 The Committee welcomes the fact that member States will no longer be able to require the appointment of a tax representative, but notes that they will still have the option to designate a person other than the person liable for payment of the tax. The only restriction on the exercise of this option is a statement to the effect that it must not give rise to provisions which create a disadvantage specifically for non-established taxable persons.

4.4.1 The Committee questions the need to retain this option and hopes that Member States will not take advantage of it to negate the effects of this proposed Directive by stipulating that where a trader appoints an agent, whether it be a person or a firm, to act on his behalf in fulfilling his obligations to the VAT authorities that agent shall be jointly and severally liable with the trader for payment of the tax, regardless of whether or not the trader is established in the territory of that Member State"

56. Finally, under Conclusions, the ESC said:

"It has some concern that these benefits might be impaired or nullified if Member States exercised their option to designate a person other than the person liable for payment of the tax as being jointly and severally liable for payment of the tax in such a way as to make this a general requirement for all traders, both non-established and established, who appointed an agent to act on their behalf in complying with their statutory obligations. The Committee expresses the hope that Member States will not act in this way."

57. Mr Peacock submitted that it is as clear as daylight that the Commission and ESC thought the provision which became Art.21.3 is perfectly general in import. So the travaux preparatoire confirm the literal meaning and the meaning to be derived from the legislative history.
58. Mr Peacock makes this further, telling, point: what, he asks, is the point of the power to impose joint and several liability? The answer is self-evident – it is to protect the collection of tax due. Arts.21.1 and 21.2 identify the persons liable. But if there are problems about one of these, then, always subject to the general principles, there is the residual power to impose joint and several liability. And that is exactly what the impugned provisions are for in this case – to prevent abuse and protect tax revenue which is properly due.

The Federation's Arguments

59. Maître Waelbroeck joins issue with Mr Peacock at every point in his argument. Starting with just the words used in the 2000 Directive, he points out that Art.21.3 opens with "In the situations referred to in paragraphs 1 and 2." What, he asks, are these for? If there is simply a general power to impose joint and several liability, they are unnecessary. The "situations" referred to must be something other than all the cases referred to in paragraphs 1 and 2: they are the exceptional situations where someone other than the person who carries out the supply is made the person liable to pay tax, for instance the second paragraph of case (a).
60. As far as the legislative history is concerned, Maître Waelbroeck disputes that there was ever any general power to created joint and several liability. In the 1977 Directive and in all subsequent versions, the sentences creating the power are tied to and are merely additional to, whatever immediately precedes them. For instance the 1977 paragraph 1(a) has four sentences. The first creates the general rule ("persons who carry out taxable transactions"). The second and third create an exception (a tax representative system where the person who carries out the service is aboard) and the fourth (the power to provide for joint and several liability) clearly is limited to that exception. What it is saying is that in addition to a tax representative system Member States may provide for joint and several liability.
61. All the subsequent amendments, submits Maître Waelbroeck, conform to this pattern. Other exceptions to the general rule were introduced – and each time the power to create joint and several liability follows on and is tied to the exception.
62. As regards the travaux preparatoires, Maître Waelbroeck submitted they too supported his case. Whilst it is true that there are passages which, read out of context, might be read as saying that the Commission or ESC thought there was a general power, in context those passages all come after reference to the exceptions to the general rule, exceptions whereby some person other than he who carried out the transaction is liable. Implicitly it follows, he said, that, that just as in the 1977 Directive, the power only arises in that context.
63. Fundamentally Maître Waelbroeck argued that the general principle is that the person who carries out the transaction is the person who is to be liable, that the policy is to have as few exceptions to that as possible, and that a general power to create joint and several liability would blow a hole in the key principle. It is a general principle of construction of Community instruments that exceptions are to be construed narrowly and Art.21.3 is in the nature of an exception and should be so construed.

The Judge's View

64. The Judge thought the Federation was probably right:

"I consider that the construction by Maître Waelbroek has not merely a substantial prospect of success but indeed is likely to succeed. As regards the argument advanced by Mr Peacock, it seems to me to a degree improbable that the draftsman intended to give Member States the power to make such a fundamental change in the structure of the VAT legislation. It is more probable that the intention was merely to broaden the limited jurisdiction conferred on Member States by that article. I do not find any support for Mr Peacock's proposition in the use of the word "situation" in article 16.1. Rather that user is consistent with the meaning contended for by Monsieur Waelbroek. Nor do I find any significance in any change in the ambit of the current article from that of its predecessor. The article is substantially reformulated and there is no reason to believe that any material change in its effect was not intended."

My Opinion

65. I do not agree. In my opinion Mr Peacock is right and clearly so. Art. 21.3, were it to fall to be considered by the ECJ, would be construed as conferring the necessary power to enact the impugned legislation. I will state briefly why.
66. First, on the literalist approach, I can see no real reason for saying that some cases referred to in Art. 21.1 and 21.2 are "situations" and others not. It is true that one can ferret around in the legislation to compare and contrast the use of the words "situation" and "case" in various parts of the Directive and Maître Waelbroeck might get some support in that way, though Mr Peacock disputes that and says it is he who gets support.
67. But that sort of literalist reasoning based on inference from the use of one word or the other in a different part of the legislation is simply not the way the ECJ goes about the job of construing EU legislation. It construes purposively and teleologically – moreover in an ambulatory way with the problems of the present and future in mind, not as an historian.
68. So I think the Court is bound to ask what Art.21.3 is for in a 21^st century context. Mr Peacock's answer is that it confers a general power to create joint and several liability where that is necessary to prevent abuse of the VAT system. It is not limited to cases where an exception has been created from the general rule, as Maître Waelbroeck proposes.
69. Maître Waelbroeck could find no answer to that. He accepted that the purpose of the power to create joint and several liability in those cases where someone other than the person carrying out the supply was to deal with problems of difficulty of collection arising from cross-border complications of one sort or another. But he could not suggest any reason why the power should be limited just to those cases. Instead he resorted to the general rule that only one person should be liable and that person should be the person carrying out the supply.
70. Maître Waelbroeck in effect invites that the Court to construe the legislation so that Member States are not given the power to prevent a massive abuse of the system. I just cannot envisage it doing that. The language does not compel it. I cannot imagine any Member State supporting the construction (indeed I suspect many will support the UK's position). Given the widespread nature of such national provisions (as I have said CCE say 13 member states by now – apparently borrowing from an idea originating with the Dutch legislation) the Commission must be aware of what has been done. Yet it has not suggested that any Member State in enacting anti-abuse provisions using the Art. 21.3 power has broken Community law.
71. At one point I wondered whether there might be a point in that Mr Peacock's argument involved limiting the power by general principles whereas Maître Waelbroeck's did not. But even if the power were more limited as Maître Waelbroeck suggests, the power would still need to be restricted by general principles. So both sides accept these must limit the power. Accordingly this is a purely neutral point.
72. As regards the Judge's view I think he was clearly mistaken. It ignores purposive construction which lies at the heart of the ECJ's approach. He is clearly wrong in saying the Article makes no material change – see paragraphs 40-42 and 64 above. He assumes that there is a fundamental change in the structure of VAT legislation. But a power to prevent abuse, controlled as always by the general principles, is miles away from a fundamental change.
73. It follows that if it were left to me I would not refer. The logical consequence of my view would be that the application for judicial review should be dismissed. And that is what I would propose but for the combination of three things. First although I have formed a firm view, the other members of the Court are not so sure. Second I am differing from the Judge. And thirdly this is clearly an EU-wide problem and it would be a thoroughly good thing if the ECJ declared for the whole EU that Arts. 21.3 and 22(8) permit member states to enact laws preventing abuse of the VAT system. Accordingly, although it is not strictly logical, I concur in the proposal that appropriate questions should be referred to the ECJ.
74. As to the form of those questions it is highly desirable that they be sorted out quickly. In the hope of saving time, I would, with some diffidence, propose the following questions:

"1. Does Art.21.3 of Council Directive 77/388/EEC as amended by Council Directive 300/2065EC permit Member States to provide that any person may be made jointly and severally liable for payment of tax with any person who is made so liable by Art. 21.1 or 21.2, subject only to the general principles of Community law namely that such a measure must be objectively justifiable, rational, proportionate and legally certain?

2. Does Art.22(8) of the Directive permit Member States to provide that any person may be made so liable or to provide that one person may be required to provide security for tax due from another subject only to the aforesaid general principles?

3. If the answer to question 1 is no, what limits, other than those imposed by the aforesaid general principles, are there on the power conferred by Art. 21.3?

4. If the answer to question 2 is no, what limits, other than those imposed by the aforesaid general principles, are there on the power conferred by Art. 22(8)?

5. Are member states precluded by the Directive as amended from providing for joint and several liability of taxpayers or from requiring one taxpayer to provide security for tax due from another in order to prevent abuse of the VAT system and the protection of revenues properly due under that system, if such measures comply with the aforesaid general principles?

75. The parties should be free to comment on my proposal or to suggest their own questions. They should do so when this judgment is formally handed down so that the order can be drawn up and transmitted to the ECJ before the end of term.
76. It remains only to comment on the CCE's current position. Mr Peacock frankly told us that the CCE only appealed to this Court rather than going on a reference was for the sake of speed. In the result he has in fact lost time. Given the amount of money at stake (both in the UK and across the EU) it is highly desirable that the ECJ should decide this reference as soon as possible. Meanwhile it is accepted that the CCE can use the impugned provisions. We were told they are only using the security provisions. That is of course a matter for them. On my view they are free also to use the joint and several liability provisions and all threats from the Federation about claims for damages are nothing more than "sound and fury signifying nothing."

Sir Charles Mantell :

77. I gratefully adopt Lord Justice Jacob's comprehensive review of the background to this appeal and the legislative history of the relevant provisions. I agree with his resolution of the preliminary points for the reasons which he gives. I also agree with his proposed outcome, namely that the reference to the E.C.J. should stand. It would be unnecessary for me to say more but for my Lord, having expressed his views in typically robust fashion, and having referred to my pusillanimous failure to come off the fence.
78. So I propose, very briefly, to explain my reasons for thinking that the answer is less obvious than it appears to Jacob LJ.
79. First, looking at Article 21 of the Directive in its present form, I have difficulty with the notion that the power conferred by Art. 21(3) should be wider in its application than that available under Art. 21(1) and (2). Why, I wonder, to take Art 21(1)(a) as an example, should the Directive impose constraints on the power to substitute the recipient of the supply for the supplier as liable to pay the tax when it would be open to add the same person under Art. 21(3).
80. Secondly, I am concerned, as was the Judge, to understand what is meant by "in the situations referred to in paragraphs 1 and 2". I would hesitate to offer a firm view but it does seem to me that it is at least arguable that the identification of the person liable to pay value added tax as the person carrying out the supply is not aptly described as a "situation".
81. Thirdly, if contrary to the view formed by Jacob LJ but consistent with that expressed by both Mr Peacock QC and Maître Waelbroeck the placement of the power to make persons jointly and severally liable in a separate paragraph was not intended to alter the effect of the original, then again, it seems to me, that adds force to the argument put forward on behalf of the Federation and tentatively accepted by the Judge.
82. Having expressed my concerns, however, I should make it plain that I well understand the practical advantages of the approach favoured by Jacob LJ.

Lord Justice Ward:

83. My first impression was that it would be quite ludicrous to suggest that an E.C. Directive was so lacking in clarity that it could possibly prevent Her Majesty's Government legislating to plug a gap in the law on V.A.T. which was being exploited by dishonest traders to plunder billions of pounds from the Exchequer. My preliminary view was that of course that was a situation which could be brought within paragraphs 1 or 2 of Article 21. Thus it is with real misgiving that I conclude we must refer to the Court of Justice. I am now beset with these doubts.

The Literal Construction.

84. Article 21 gives effect to the general principle, explained by the Commission on 27.11.1998 in its proposal for the Directive to be:-

"The general principle that the Commission wished to see adopted by the Member States was that the person liable for payment of the tax should be the taxable person (whether or not he is established) and that there should be as few exceptions (tax representative or person for whom the supply is intended) as possible to this rule."

That suggests, and ordinary principles of construction dictate, that the ambit of the exceptions should be narrowly construed. Paragraph 1(1)(a) gives the general rule - the taxable person is he who carries out the taxable supply – but subject to exceptions for "the cases" referred to in (b) and (c) and with a further qualification for the non-established supply introduced by the separate paragraph beginning "where …". Where the qualification applies, and arguably in that "situation", Member States may provide otherwise.

85. Paragraph 1(2) allows for derogation "where" a tax representative may be appointed and once again the circumstances where those derogations apply can aptly be called "situations".
86. Arguably, therefore, "situations" is confined to those exceptional circumstances and paragraph 21(3) does not allow the Member States carte blanche to appoint someone else to be jointly and severally liable in all and any circumstances. If that were the intention, why did not paragraph 21(3) simply provide, "Except in the case of importation mentioned in paragraph 4, Member States may provide [for joint and several liability] "?

The historical survey.

87. It is common ground that a clear purpose of the 2000 amendment was to simplify the rules but not to make changes to them. Under the previous Directive the circumstances in which joint and several liability could have been imposed were self-contained within sub-paragraphs (a), (b) and (d). Sub-paragraph (c) which applies to the person who mentions V.A.T. on an invoice, stood alone with no power in that case to direct another to be liable. If, however, Mr Peacock is correct, the power is now given in that "situation", as Mr Peacock construes it to be. I can find no easily discernible justification for or a purpose in this extension. If, on the other hand, Maître Waelbroeck's construction is correct, then no change was made.

Conclusion.

88. The test I have to apply is set out in Reg. v International Stock Exchange of the United Kingdom and the Republic of Ireland Ltd., Ex Parte Else (1982) Ltd. [1993] Q.B. 534 where Sir Thomas Bingham M.R. held at page 545:-

"… If the facts have been found and the Community law issue is critical to the court's final decision, the appropriate course is ordinarily to refer the issue to the Court of Justice unless the national court can with complete confidence resolve the issue itself. In considering whether it can with complete confidence resolve the issue itself the national court must be fully mindful of the differences between national and Community legislation, of the pitfalls which face a national court venturing into what may be an unfamiliar field, of the need for uniform interpretation throughout the Community and of the great advantages enjoyed by the Court of Justice in construing Community instruments. If the national court has any real doubt, it should ordinarily refer."

89. With regret I conclude that the correct application of Community law in this case is not so obvious as to leave no scope for any reasonable doubts. I am compelled, therefore, to refer the questions to the Court of Justice. My misgivings are obvious. Were the matter one of domestic law my first impression would prevail. Dishonest trade in these goods must be stamped out. Sections 17 and 18 of the Finance Act 2003 provide ample safeguards for honest traders, though they will be put to inconvenience. Like Jacob LJ, I encourage the Commissioners to apply the impugned law in the expectation of eventual victory in Luxembourg. With so much money at stake I earnestly hope the Court of Justice will be able to expedite the determination of the questions we reluctantly have to send them.