London WC2 A2U
B e f o r e :
|THE QUEEN ON THE APPLICATION OF FREESERVE.COM PLC||Claimant|
|THE COMMISSIONERS OF CUSTOMS & EXCISE||Defendant|
|AMERICA ONLINE, INCORPORATED|
|(a company incorporated in Delaware, USA)||Interested Party|
Smith Bernal WordWave Limited
190 Fleet Street, London EC4A 2AG
Tel: 020 7404 1400 Fax: 020 7404 1424
(Official Shorthand Writers to the Court)
MR N PAINES QC and MR P MANTLE (instructed by The Solicitor for Customs & Excise) appeared on behalf of the Defendant.
MR N PLEMING QC and MR A LIDBETTER (instructed by Herbert Smith) appeared on behalf of the Interested Party.
Crown Copyright ©
"I am writing to inform you of the conclusions that have been reached in the light of the recent policy review of this issue and, more particularly, of significant developments in EC negotiations on immediately relevant elements of EC VAT law. I enclose an advance copy of a business brief that Customs will be issuing on 14th March. I thought it only right to inform you personally, given the very immediate interest that your company has in the matter and the active contribution that you made to the review process. I hope that you will accept this as a reply to your letter of 11th January.
"As you will see from the terms of the business brief, Customs have concluded that the most legally certain route to achieve consistency of VAT treatment of all ISPs [that is Internet Service Providers] and all Internet service packages lies in forthcoming changes to the relevant EC provisions. I concur with that conclusion. The relevant changes will come with implementation of the VAT and E-commerce directive and will, in practice, deliver the 'level playing field' that I am very conscious that you and other UK-based ISPs have been pressing for vis-a-vis other suppliers.
"So fundamental is the framework of EC law to our policy options here in the UK that Customs are not persuaded that we could act with sufficient legal certainty to alter the VAT treatment of Internet service packages in advance of the forthcoming changes at the EC level. This conclusion is reinforced by the outcome of Customs' review of the current VAT treatment of Internet service packages. By revealing that such packages materially differ in their constituent elements and so are not unambiguously predominated by telecommunication services, the review underscored the fact that differences in current VAT treatment are a direct and inevitable function of the existing provisions of the EC rules in this field. Hence, the UK's very active involvement in the EC negotiations on the VAT and E-commerce directive.
"The recent political agreement on that directive, in terms that substantially reflect UK input, is very welcome. It is welcome not only for the clarity it will bring to the treatment of E-commerce services more generally, but also because the changes, particularly those in relation to the taxation of content, will put beyond debate the VAT treatment of Internet service packages; such packages will all be fully taxable as a single supply, irrespective of the location of the supplier or the make-up of the package.
"I appreciate that you may find this outcome disappointing at least in the short-term, given that you have been pressing for a policy change based on existing rules, but I hope that you will recognise that EC changes are, in practice, an essential basis on which to found our policy in this area. It is those changes which will bring legal certainty and so achieve the equivalence of the treatments that we desire."
"The review [that is the review by the Commissioners] was conducted in consultation with a number of the major ISPs providing Internet service packages, based both in the UK and outside the EC. The review revealed that, in practice, such packages vary significantly in terms of their constituent elements and are not all clearly predominated by telecommunication services. The review thus underscored the fact that differences in the current VAT treatment of such packages are a direct function of existing EC provisions which fail specifically to cover packages of Internet service and content."
"Having considered all this information, not withstanding the exhaustive enquiries that we have undertaken into the nature of AOL's supply, the policy team did not feel that we had sufficiently robust evidence applying CPP [and by that, he is referring to the Card Protection Plan case] principles to persuade a tribunal that the telecommunication services element of AOL's package was predominant.
"AOL's argument that their customers spent a significant proportion of their time using AOL content pages remained a particular and telling consideration here. In particular, we were aware that the data provided by AOL would be deployed by them in any subsequent legal challenge should we have concluded that AOL's supplies were liable to VAT in the UK. As we did not believe that we could refute AOL's usage figures, having examined them in detail we held little hope of successfully challenging these figures in any subsequent tribunal or court case. We further concluded that, if we were to rule that AOL's supply was indeed taxable, that would be very likely to precipitate a very probably protracted legal challenge.
"Members of the policy team experienced in dealing with tribunal and high court appeals on place of supply cases were firmly of the view that our chances of successfully defending such an appeal were poor. Against that background, I discussed the issue with the head of division, Simon Woodside. We took into account the policy team's view about the likely chances of defending in the tribunal a decision adverse to AOL.
"On the other hand, the revenue involved was substantial and the then current position gave rise to a difference in tax treatment between AOL and UK-based ISPs. These considerations weighed in favour of attempting to uphold an assessment, but the option of changing our policy on AOL, knowing that we were likely to be subsequently defeated on appeal, was not an attractive one.
"We concluded that the route of the problem lay in the evident deficiencies of the underlying EU rules on the place of supply [and this starts paragraph 17]. We knew that negotiations were taking place within the EU on the VAT and E-commerce directive, which would make all services supplied electronically taxable within the community. Our awareness of the forthcoming directive did not distract us from the need to apply the CPP approach to AOL under the existing law. We did apply the CPP approach and considered that Customs were likely to lose an appeal on the basis of that approach.
"The decision whether or not to change our policy towards AOL supply was finely balanced, but our view that we were not like to successfully uphold an assessment, coupled with the prospect of future certainty in the law and equal treatment of the relevant supplies, led us to recommend that the policy should not be changed in the meantime.
"As this was a relatively significant policy issue, which had seen some lobbying of treasury ministers, we consulted ministers. Also, on 7th March 2002 Simon Woodside discussed our conclusions with the relevant commissioner, Mr Elland. Mr Elland concurred with the conclusion that there were not sufficiently robust grounds for us to seek to tax AOL supply and thus for a change to our policy on the VAT treatment of non-EU-based ISPs.
"Given that Freeserve and other interested parties have made representations to treasury ministers and officials about this whole issue, we recommended that, as a matter of courtesy to those who had written and/or had an immediate interest in the matter, the Financial Secretary to the Treasury should write setting out Customs' conclusions and enclosing an advance copy of the relevant business brief.
"When making public the outcome of the review, it was consciously expressed in general terms. Given that we do not ordinarily refer in material for general publication, such as business briefs, to specific taxpayers except when commenting on decided cases.
"Equally, we would not give information to one taxpayer about the affairs of another taxpayer. Hence, the terms of the relevant business brief and the letters from the minister to interested parties.
"The conclusion of the review was framed in terms of the VAT treatment of supplies made by non-EU ISPs, even though the nub of the matter had of course been the treatment of AOL's supply. The terms 'not all clearly predominated' and 'not all unambiguously predominated', used respectively in the business brief and letters from the minister, reflected the position that the element of telecommunication services did appear to clearly predominate in some Internet service packages but that we thought it unlikely that we could persuade a tribunal that they predominated in the case of AOL's supply. We considered that it would not be proper to be any more specific than to use the phrases used in the business brief and letters from the minister.
"Taking account of our view that the route of the problem of different treatment lay in the evident deficiencies of the underlying EU rules on the place of supply, we saw the EU process as an important consideration when explaining and presenting the outcome of our review, because we felt it was both legitimate and appropriate to point to the fact that the forthcoming changes to the EU provisions would indeed introduce a new approach to place of supply for Internet service packages, which would put the whole issue beyond doubt. This was the thinking behind the way in which the outcome of the review was presented to interested parties. In short, we are pointing up to those that we knew would be disappointed a more positive prospect in terms of the EU changes which would, of course, deliver the outcome that they sought.
"We considered this a legitimate thing to do from a presentational point of view, but in no sense did we intend to signal that that was the principal basis for our decision.
"In summary, whilst we were certainly conscious of the EU changes at the time of our decision, the fundamental reason not to change policy was because such action was not justified on the evidence that was available to us, having applied the CPP principles to that evidence, nor tenable in terms of its exposure to legal challenge."
"Regarded collectively, these cases [and there had been a reference to earlier authority] show the great importance of strictly correct motives and purposes. They show also how fallacious it is to suppose that powers conferred in unrestricted language confer unrestricted power. Lord Esher, Master of the Rolls, stated the irrelevant considerations doctrine, in a case where a vestry had mistakenly fixed the pension of a retiring officer on the erroneous assumption that they had no discretion as to the amount, and the quotation is:
'That they must fairly consider the application and not take into account any reason for their decision which is not a legal one. If people who have to exercise public duty, by exercising their discretion, take into account matters which the courts consider not to be proper for the exercise of their discretion, then, in the eye of the law, they have not exercised their discretion.'
"The doctrine applies equally [and this is the text continuing] to failure to take account of some consideration which is necessarily relevant, such as the respective costs of rival proposals or the availability of more suitable land.
"Mr Justice Cooke explained in a New Zealand case that the more general and the more obviously important the consideration the readier the court must be to hold that Parliament must have meant it to be taken into account."
"Schedule 11 shall have effect, subject to Section 92(6), with respect to the administration, collection and enforcement of VAT."
"VAT shall be under the care and management of the Commissioners."
"Where a person has failed to make any returns required under this Act or under any provision repealed by this Act, or to keep any documents and afford the facilities necessary to verify such returns, or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him."
"The applicant, a national of the Republic of Uzbekistan, and his family came to the United Kingdom from Greece and applied to the respondent council to be housed on the grounds that they were homeless. The applicant made a full statement explaining that they had moved to Greece from Uzbekistan partly because of the political climate there and partly so that his wife could look after her sick father, but that the fathers' relations had persecuted and threatened the lives of him and his family. Pursuant to its statutory duty to ascertain whether the applicant had become homeless intentionally, the council wrote to persons in Greece seeking corroboration of his account, but received no reply. Thereafter, the council's principal homelessness officer, L, made the decision that the applicant had become homeless intentionally and, pursuant to the council's obligation under Section 64(4) of the Housing Act 1985, the applicant was notified of that decision and of the reasons for it; namely, that the counsel was not satisfied that the applicant had experienced harassment in Greece and that it was, therefore, reasonable that he and his family should continue to live there. The applicant applied for judicial review of the decision.
"For the purposes of the proceedings, L swore an affidavit explaining that the true reasons for his decision were not those expressed in the decision letter, but rather that he was satisfied that, notwithstanding the matters disclosed in the applicant's statement, it would have been reasonable for him and his family to continue to occupy the accommodation he rented in Greece.
"At the hearing, the deputy judge permitted the council to rely on L's affidavit evidence to justify the legality of their decision and dismissed the application.
"The applicant appealed, contending that the deputy judge had erred in paying regard to the affidavit evidence, since wholly deficient statutory reasons could not be made good by such evidence in the course of the proceedings. The council contended that, since the requirements of Section 64 as to notification were purely procedural, notification of the wrong reasons was a purely technical error which should be allowed to be corrected by the affidavit of the decision maker.
"It was held: in the context of Section 64 of the 1995 Act, it was unrealistic to seek to draw any significant distinction between the decision and the communication of a decision with reasons or to treat the giving of reasons as purely procedural. Since Section 64 required that reasons should be given at the same time as the decision was communicated, it followed that, if no reasons or wholly deficient reasons were given, an applicant for judicial review was prima facie entitled to have the decision quashed as unlawful, whether or not he could show that he suffered any prejudice.
"Secondly, although the court could, and in appropriate cases would, admit evidence to elucidate or, exceptionally, correct or add to the reasons given by a housing authority, it would be very cautious about doing so. The function of such evidence would generally be elucidation, not fundamental alteration, as, for example, where an error had been made in transcription or expression or a word or words had been inadvertently omitted.
"However, in cases where the reasons stated in the decision letter had been shown to be manifestly flawed, it should only be in very exceptional cases that relief should be refused on the strength of reasons adduced in evidence after the commencement of proceedings, even where it was clear that, on reconsideration of the authority, the decision would be the same."
"By revealing that such packages materially differ in their constituent elements and so are not unambiguously predominated by telecommunications services, the review underscored the fact that differences in current VAT treatment are a direct and inevitable function of the existing provisions of the EC rules in this field."
"The review will reveal that in practice such packages vary significantly in terms of their constituent elements and are not all clearly predominated by telecommunications services."