England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		23rd March 2006

Mr Justice Park:

Abbreviations, dramatis personae, etc

1. These are as follows:

Berkholz	The ECJ decision in Berkholz v Finanzhamt Hamburg-Mitte-Alstadt; Case 168/84, [1985] ECR 2251; see especially paragraph 24(i) of the judgment below.
Customs & Excise	Her Majesty's Customs and Excise, at most relevant times the United Kingdom Government Department responsible for VAT; now merged with the Inland Revenue into HMRC (for 'HMRC' see below).
DFDS	The ECJ decision in Customs & Excise Commissioners v DFDS A/S; Case C-280/95, [1997] STC 384; see especially paragraph 24(ii) of the judgment below.
Directive, the	Usually the Sixth Directive, as to which see 'Sixth Directive, the' below.
ECJ	The European Court of Justice, more fully entitled the Court of Justice of the European Communities.
Hamilton, Mrs	Penny Hamilton, counsel for ZIC in this appeal, leading Mr Richard Vallat.
HMRC	Her Majesty's Revenue and Customs; since the merger of Customs & Excise and the Inland Revenue the United Kingdom Government Department responsible for VAT; the appellants in this case.
Member State	A Member State of the European Union; the United Kingdom is a Member State; Switzerland is not.
Pleming, Mr	Nigel Pleming QC, leading counsel for HMRC, leading Mr Adam Robb.
PwC AG	PricewaterhouseCoopers AG; a Swiss accountancy and financial consultancy business.
PwC(UK)	The United Kingdom partnership of PricewaterhouseCoopers.
RAL	The ECJ decision in RAL (Channel Islands) Ltd v Customs and Excise Commissioners; Case C-452/03, [2005] STC 1025; see paragraph 24(iii) of the judgment below.
Sixth Directive, the	The sixth Council Directive of 17 May 1977 on the harmonisation of the laws of Member States relating to turnover taxes – common system of VAT: uniform basis of assessment. The main Council Directive as to the structure and detailed rules of VAT in Member States of the European Community.
SAP	A financial software system; see paragraph 9 of the judgment below.
Tribunal, the	The VAT and Duties Tribunal.
VAT	Value Added Tax.
VATA	The Value Added Tax Act 1994.
Work Order	A contractual order made between ZIC and PwC AG (or, in the case of the first Work Order, between a United Kingdom service company within the ZIC group and PwC(UK)) for the provision of consultancy services relevant to this case.
Z-Core	A template adopted by ZIC for the configuration of computerised financial systems for all branches and subsidiaries of the group. See paragraph 8 of the judgment below.
ZIC	Zurich Insurance Company, a Swiss company; the respondent in this case.
ZIC(HO)	The Swiss head office of ZIC.
ZIC(UK)	The United Kingdom branch or branches (or establishment or establishments) of ZIC.

Overview

2. Customs & Excise made assessments to VAT upon ZIC under the reverse charge provisions of VATA s.8 (of which more later) for the five quarterly periods ending between 31 December 1999 and 31 December 2000. Nothing at this stage turns on the detailed figures, which remain to be agreed or determined when questions of principle have been finally decided. However, the amount involved is substantial. The net amount of VAT claimed by the assessments under appeal was a little over £2m. If the assessments are upheld in principle the final figure may change, but it will probably remain in the region of £2m.
3. In 1999 and 2000 a new software system was installed in the United Kingdom operations of ZIC. For that purpose ZIC, acting by its head office in Switzerland (referred to in this judgment as ZIC(HO)), engaged the consultancy services of PwC AG, which subcontracted performance of the services to PwC(UK). All or substantially all the services were physically provided by personnel of PwC(UK) in the United Kingdom, and were provided at business premises of ZIC in the United Kingdom. (ZIC in respect of its United Kingdom operations carried on at its United Kingdom branch premises is generally referred to in this judgment as ZIC(UK). I should spell out that ZIC(HO) and ZIC(UK) are not separate legal entities. They are merely different parts of the business structure within one legal person, namely ZIC.)
4. PwC AG invoiced ZIC(HO) for its consultancy charges. Those invoices did not include any charge to VAT under United Kingdom law or under the law of any other member state of the European Union. (Originally it was thought that there would be a VAT charge in Switzerland, not a member state, at 7.5%, but I understand that in the event no Swiss VAT was payable, and that a payment originally paid was repaid.) The result was that consultancy services contracted for by ZIC(HO) in Switzerland but performed for ZIC in the United Kingdom and provided physically at premises of ZIC(UK) were received without the addition of any charge for VAT. Suppose that the contractual price, before VAT, for the services was 100. Apart from the issue raised in this case, the cost of the services to ZIC would have been only 100. If, however, ZIC(UK) had obtained the same or similar consultancy services from a United Kingdom-based supplier (for example PwC(UK)), it would have been invoiced for them at their basic contractual price of 100, plus 17.5% for VAT, making a total of 117.5. The supplier of the services would have been liable to account to Customs & Excise for the 17.5 ('output tax'). Since most of the supplies which ZIC(UK) makes in the course of its business are exempt supplies (being supplies of insurance, exempt by reason of VATA Schedule 9 Group 2), ZIC(UK) would have been able to recover from Customs & Excise only a small proportion of the 17.5 (the 'input tax') which it paid as part of the invoiced price charged to it by the supplier. If I assume (arbitrarily, and for purposes of illustration only) that it could have recovered 10% of its input tax, it would have recovered 1.75. The net cost of the services to it would have been 100 plus 17.5 minus 1.75, which comes to 115.75.
5. In those circumstances Customs & Excise contended that the reverse charge provisions of s.8 meant that ZIC(UK) was liable to pay VAT of 17.5 to them (that is to Customs & Excise), and was entitled to recover 1.75 from them. Customs & Excise assessed ZIC to VAT on that basis.
6. ZIC appealed to the Tribunal. By a decision released on 30 June 2005 the Tribunal (Dr Avery Jones and Mr Shaw) allowed the appeal in principle, leaving detailed figures to be agreed or, if they could not be agreed, determined later. HMRC (as Customs & Excise have now become) have appealed to the High Court, and the appeal has come before me. For the reasons which I will explain, I respectfully disagree with the decision of the Tribunal, and I will allow the appeal.

The facts

7. ZIC is a Swiss company with its headquarters in Zurich. It was established in 1873, and is now at the head of a major insurance group with operations in many countries throughout the world. It has subsidiaries and branches in many countries, including a large operation in the United Kingdom. For the most part this case is concerned with the United Kingdom branch (referred to as ZIC(UK) in this judgment) rather than with United Kingdom subsidiaries, but there is one respect in which subsidiaries are relevant. I will come to that just before the end of this judgment. The term 'branch' is conventional, but it should not be thought to imply that ZIC(UK) operates at only one location in this country. I believe that there are seven substantial offices. The United Kingdom operations are conducted on a considerable scale, especially after a merger in 1998 with the businesses of several other insurance companies, two of which were of substantial size. In 2000 ZIC(UK) received premiums of almost £2bn. After the merger the group had about 21,000 employees in the United Kingdom. (I do not know how they divided between employees of ZIC(UK) and employees of United Kingdom subsidiary companies.) Within ZIC's world structure the United Kingdom is part of the 'UKISA' region. UKISA is the United Kingdom, Ireland, and South Africa. This case is only concerned with the United Kingdom part of UKISA.
8. In the 1990s ZIC(HO) commenced and continued the development in Switzerland of a template, which it called Z-Core, for the computer-based systems to be used throughout ZIC's worldwide group for high level management information and recording. Z-Core, if I have understood correctly, is not so much a software system itself as a description of what the functions and capabilities of all the software systems used in the numerous branches and subsidiaries of ZIC throughout the world should be like. A major purpose of it was and is that at world headquarters level the overall management of the group should have access to information, configured on a consistent basis, about the business activities and results of all the branches and subsidiaries around the world. The plan was that, once Z-Core had been planned and designed in sufficient detail, it would (even though the process of development of it continued) be 'rolled out' in all the separate 'BUs' (business units) around the world. The design of Z-Core has been a head office function intended to create a pattern applicable to all the activities of the worldwide group, but the installation in the separate business units of software systems designed and configured to operate within the parameters of the Z-Core function was to be a series of different operations.
9. In the United Kingdom the introduction of the Z-Core template involved the installation of new financial software known as SAP (from the name of the German company which designed the software). The Tribunal states:

"SAP is a set of software tools used by many international businesses to keep business records, prepare accounts, monitor budgets, control costs and handle many other business process needs. ... The output from SAP provided management reporting, regulatory reporting (such as insurance company regulation, direct tax and VAT) in sterling and based on UK GAAP [Generally Accepted Accounting Principles] for ZIC(UK), local reporting based on IAS [International Accounting Standards], and also information required by ZIC(HO) for Group reporting in other currencies and based on IAS with an addition for insurance company reporting known as NewZAP. Consolidation worldwide was performed by the output from SAP being passed through another system, Cormis."

10. This case is not about the VAT consequences of expenditure incurred in connection with the development and design of Z-Core. It is only about the United Kingdom VAT consequences of expenditure on the services of consultants who were engaged to assist upon the installation of SAP into the activities of ZIC(UK). That was a major and expensive operation. ZIC could not have done it using only its own internal resources. It needed outside consultants, and it incurred large consultancy fees.
11. For the first phase of the installation of SAP in the United Kingdom (covered by 'Work Order 1'), the consultant engaged was PwC(UK). The contract relating the Work Order 1 was made, not by ZIC itself, but by the group's United Kingdom service company .No disputed VAT issue arises in connection with PwC(UK)'s fees for that first phase. The detail of what was done does not appear in the Tribunal's decision or in the documents which I have seen. I infer, however, that PwC(UK) invoiced ZIC (either ZIC(HO) or ZIC(UK) or the service company – I do not know which) for a fee plus 17.5% for United Kingdom VAT, and that ZIC(UK) (or the group representative member if that was not ZIC(UK)) recovered from Customs & Excise only the small proportion of the 17.5% which it was able to recover by reason of nearly all of the supplies made by companies within the United Kingdom VAT group being exempt supplies (see paragraph 4 above).
12. For later phases of the installation of SAP into the operations of ZIC(UK) (the phases covered by subsequent Work Orders) the contractual pattern for the engagement of consultants changed. ZIC(HO) contracted with PwC AG for consultancy services to be provided to ZIC in the United Kingdom; PwC AG sub-contracted the work to PwC(UK). Thereafter (as I have already said in paragraph 3 above) the consulting work was actually done in the United Kingdom by personnel of PwC(UK). PwC AG invoiced ZIC(HO) in Switzerland. The invoices did not include any charge for United Kingdom VAT. The original intention was that ZIC would meet the costs out of its head office funds, but later it was decided that the funds of ZIC's United Kingdom branch should make transfers to head office of amounts equal to PwC AG's charges. These transfers were internal transfers between different holdings of money of a single legal person, and in themselves had no VAT consequences.
13. At the risk of labouring excessively the point made in paragraph 10 above about the difference between the development of Z-Core (a matter relevant to ZIC's business worldwide) and the consequential installation of SAP into the activities of ZIC(UK) (a matter relevant, or primarily relevant, to ZIC's business in the United Kingdom), I wish to quote a number of passages from the Tribunal's decision (in addition to the passage quoted in paragraph 9 above, which is also relevant to the same matter) and from documents which the Tribunal had before it. I also quote passages to show that the central role which SAP was to perform was a role within the United Kingdom business of ZIC(UK). I do these things because the Tribunal made a finding that the work on installation of the SAP system was carried out for the benefit both of ZIC(UK) and of ZIC(HO), and in my view ZIC attempts to place on that finding a greater burden than it can bear.

i) 'Z-Core was the starting point for local implementation and enabled local units efficiently to configure their own SAP systems.' (Tribunal's decision, para. 5(4)).

ii) 'ZIC(UK) required some financial reporting and accounting software, whether the existing OLAS (which was in process of being upgraded) or SAP. It would have needed outside consultancy services to implement any such system. Much of the output from such system would be required by ZIC(UK) even if it were not part of a worldwide organisation. This included its primary accounting needs, management information and reporting for regulatory purposes, including insurance company regulation and tax. Without such information ZIC(UK) would not have been able to operate.' (Tribunal's decision paragraph 5(20).)

iii) 'Z-Core is a common base system that BUs will take and use to build their own SAP systems that will incorporate full Z-Core functionality as well as their own locally required functionality.' (Part 15 page 4 of ZIC's 'Getting Started' Starter Kit.

iv) Two extracts from a feasibility study prepared by a representative of ZIC and a representative of PwC for ZIC's UKISA Region:

'This paper had been prepared for the UKISA Executive and contains the following proposal:

• To commit to the adoption of SAP as the accounting platform for the Region …'

'In terms of functionality, SAP will cover all primary accounting needs, including general ledger, purchase ledger, fixed assets, accounts payable, expense management, BU and Regional consolidation and basic management information needs.'

v) 'Whereas this Work Order relates to the implementation of SAP to support the operations of Zurich Financial Services (UKISA) Ltd as part of Zurich's world-wide project for SAP implementation.' (A recital to Work Orders for phases of SAP implementation within the United Kingdom. I believe, but am not certain, that Zurich Financial Services (UKISA) Ltd was a service company for ZIC(UK) and ZIC subsidiaries in the United Kingdom and elsewhere in the UKISA region.)

Legislative provisions: the interaction of domestic law and the Sixth Directive

14. In all VAT contexts the legislative provisions are likely to be found in two different places: in the domestic legislation (consisting of the VATA, other Finance Acts, and United Kingdom statutory instruments), and in the EC Sixth Directive. Practitioners and the courts are now well familiar with this feature of the VAT system, and normally it requires little or no exposition or discussion. It received none in the decision of the Tribunal in this case. In my view, however, the interaction of the domestic law and of the Sixth Directive is not entirely straightforward in this case, and I wish to say something about it.
15. VAT is imposed in Member States of the European Union, one of which is the United Kingdom, because the Sixth Directive imposes an obligation on the Member States to impose it. Further, the Member States have to impose it within the parameters provided by the Directive. Article 1 of the Directive provides as follows:

"Member States shall modify their value added tax systems in accordance with the following Articles."

The Directive lays down a framework of charging provisions and relieving provisions. There is an important difference between the two types of provisions so far as concerns their impact on the domestic law of the United Kingdom.

i) As regards charging provisions, it is not the case that the Directive imposes charges. The Directive requires Member States to impose the charges which the Directive specifies, but it is the law of each Member State which imposes them. If a Member State fails to impose a charge to VAT which the Directive requires, the taxpayer cannot be required to pay VAT on the ground that, under provisions of the Directive, he ought to have been required to pay it:

"… a Directive may not of itself impose obligations on an individual and … a provision of a Directive may not be relied on as such against such a person."

That passage comes from the judgment of the ECJ in Marshall v Southampton Health Authority, Case 152/84 [1986] ECR 723. It was not a VAT case, but the principle certainly applies to VAT. It should be read subject to the 'principle of consistent interpretation', under which a national law (like the VATA) should so far as possible be construed so as to conform to the meaning of the Directive. Nevertheless, when a question arises as to whether a person had been lawfully assessed to pay an amount of VAT in the United Kingdom, the first question which logically arises is whether the liability assessed has been imposed by a charging provision of the domestic law. If, even after the impact of the principle of consistent interpretation, it has not, the taxpayer cannot be made liable by an argument that, on the facts of the case, a liability is imposed by the Sixth Directive.

ii) With relieving provisions of the Directive, however, it is different. If a relieving provision is sufficiently precise a taxpayer can rely on it to be relieved from a liability imposed by a domestic charging provision even if the national legislature has failed to enact a corresponding relieving provision in the domestic law. This is the principle of direct effect, which was first affirmed authoritatively by the ECJ in the leading German case of Becker v Finanzamt Munster-Innenstadt, Case 8/81 [1982] ECR 53. I do not think that the principle of direct effect in precisely that form arises in the present case, but it does fall to be considered in a slightly different form. If the Directive requires the national legislature to impose a charge on a particular type of transaction, and the legislature imposes one but does so to a greater extent than the Directive requires, then in my opinion the liability falls to be reduced to the level, if any, which the Directive permits.

The relevant provisions of the Sixth Directive

16. The provisions of the Directive which are important for the purposes of this appeal are some of the sub-articles of articles 2, 9 and 21.

i) Article 2 is headed 'Scope'. So far as relevant it reads as follows:

Article 2

The following shall be subject to value added tax:

1 the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such..

In this case that provision needs to be considered in relation to the supply of services by PwC AG to ZIC. It was a supply by a 'taxable person' within the definition in article 4 ('any person who independently carries out in any place any economic activity specified in paragraph 2 ..'). So whether the supply by PwC AG ought to have been subject to VAT or not depended on whether it was effected 'within the territory of the country', which in this case meant within the United Kingdom. If the supply was effected in Switzerland it would not have been subject to VAT in this country.

ii) The rules about the place of supply of services are contained in article 9. The article is of critical importance in this case. The relevant parts of it are as follows:

Article 9

Supply of services

1 The place where a service is supplied shall be deemed to be the place where the supplier has established his place of business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides.

2 However:

[(a) to (d): irrelevant in this case, although I mention later a case which depended on article 9.2(c)] ….

(e) the place where the following services are supplied when performed for customers established outside the Community or for taxable persons established in the Community but not in the same country as the supplier, shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied or, in the absence of such a place, the place where he has his permanent address or usually resides:

[a series of indents follows, each describing one or more kinds of services; the one which is relevant to this case is the first part of the third indent, as follows:]

-- services of consultants …

3 In order to avoid double taxation, non-taxation or the distortion of competition, the Member States may, with regard to the supply of services referred to in paragraph 2(e), … consider:

(a) the place of supply of services, which under this Article, would be situated within the territory of the country, as being situated outside the Community where the effective use and enjoyment of the services takes place outside the Community;

(b) the place of supply of services, which under this Article would be situated outside the Community, as being within the territory of the country where the effective use and enjoyment of the services take place within the territory of the country.

iii) From article 21 I need only quote the following extracts.

Article 21

Persons liable for payment of 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).

…

(b) taxable persons to whom services covered by Article 9(2)(e) are supplied …, if the services are carried out by a taxable person not established within the territory of the country

…

17. There are several points to be made about the provisions of the Sixth Directive which I have quoted above. There are also important decisions of the ECJ about the application of article 9. I will return to those matters later, but for the present it is convenient to set out the relevant provisions of the United Kingdom statute.

The relevant provisions of the VATA

18. Although the domestic VAT legislation is by no means confined to the VATA, all the provisions which are material to this case are contained in that Act.

i) The main charging provision (but not the one under which the assessment involved in this case was made) is s.1(1)(a):

1(1) Value added tax shall be charged, in accordance with the provisions of this Act –

a) on the supply of goods or services in the United Kingdom …

The present case is about the supply of services – the supply by PwC AG to ZIC – but that supply would have attracted a liability under s.1(1)(a) only if it was made in the United Kingdom. That takes me to s.7.

ii) S.7 is headed 'Place of supply', and, as subsection (1) says, it applies for determining, for the purposes of the Act, whether goods or services are supplied in the United Kingdom. The subsection about services is subsection (10):

7(10) A supply of services shall be treated as made –

(a) in the United Kingdom if the supplier belongs in the United Kingdom; and

(b) in another country (and not in the United Kingdom) if the supplier belongs in that other country.

The concept of where a supplier 'belongs' is covered by s.9, to which I turn now, although I will have to come back to s.8 after doing so. Thus I am taking those two sections in reverse numerical order.

iii) S.9, so far as relevant, is as follows. I set out here parts of the section which affect the operation of s.8 (to which I come in (iv) below) as well as parts which affect the sections to which I have referred in (i) and (ii) above (sections 1 and 7).

9 Place where supplier or recipient of services belongs

(1) Subsection (2) below shall apply for determining, in relation to any supply of services, whether the supplier belongs in one country or another and subsections (3) and (4) below shall apply … for determining, in relation to any supply of services, whether the recipient belongs in one country or another.

(2) The supplier of services shall be treated as belonging in a country if -

(a) he has there a business establishment or some other fixed establishment and no such establishment elsewhere; or

(b) he has no such establishment (there or elsewhere) but his usual place of residence is there; or

(c) he has such establishments both in that country and elsewhere and the establishment of his which is most directly concerned with the supply is there.

(3) [Irrelevant to this case]

(4) Where subsection (3) above does not apply, the person to whom the supply is made shall be treated as belonging in a country if –

(a) either of the conditions mentioned in paragraphs (a) and (b) of subsection (2) above is satisfied; or

(b) he has such establishments as are mentioned in subsection (2) above both in that country and elsewhere and the establishment of his at which, or for the purposes of which, the services are most directly used or to be used is in that country.

(5) For the purposes of this section (but not for any other purposes) –

(a) a person carrying on a business through a branch or agency in any country shall be treated as having a business establishment there; …

So far as PwC AG's supply of consultancy services to ZIC concerned, the effect of s.9(2)(a) is that PwC AG belonged in Switzerland. Therefore its supply of services to ZIC was treated as made in Switzerland (s.7(10)(b)), and s.1(1)(a) did not impose a liability to United Kingdom VAT on PwC AG in respect of that supply.

iv) I now move back one section to s.8. It is the section which HMRC say imposed the liability assessed on ZIC(UK) in this case. I need to reproduce only subsections (1) and (2).

8 Reverse charge on supplies received from abroad

(1) ... where relevant services are –

(a) Supplied by a person who belongs in a country other than the United Kingdom, and

(b) Received by a person ("the recipient") who belongs in the United Kingdom for the purposes of any business carried on by him,

Then all the same consequences shall follow under this Act (and particularly so much as charges VAT on a supply and entitles a taxable person to credit for input tax)as if the recipient had himself supplied the services in the United Kingdom in the course or furtherance of his business, and that supply were a taxable supply.

(2) In this section relevant services means services of any of the descriptions specified in Schedule 5, not being services within any of the descriptions specified in Schedule 9.

Schedule 5 is headed 'Services supplied where received'. It lists thirteen kinds of supplies, one of which begins with 'Services of consultants'. It is agreed in this case that the services which PwC AG supplied were 'services of consultants'. Schedule 9 is the Schedule setting out the categories of exempt supplies, and nothing in it is relevant to this case. I will explain how the reverse charge under s.8 applies in this case later.

Some observations on the relevant provisions of the Sixth Directive

19. Where services are supplied in a Member State there is, or should be if the Member State has correctly implemented the Directive, a VAT liability upon the consideration for them: article 2.1(a). For present purposes I can equate the Member State with the United Kingdom, since no other Member State is involved in this case. The rules which determine whether, for purposes of the Directive, the services are supplied in the United Kingdom or not are contained in article 9, which I say more about in the next following paragraph. If the services are supplied in the United Kingdom the general rule laid down in the Directive is that the person liable to pay the VAT is the supplier: article 21.1(a). However, there is an exception for some kinds of services, one of which is consultancy services, if the services are (i) supplied to a 'taxable person' (a person who independently carries out an economic activity: article 4.1), and (ii) carried out by a person not established in the United Kingdom. In that case the VAT is payable by the taxable person to whom the services are supplied: article 21.1(b). The charge is still, as I see it, conceptually a charge upon the supply of services by the supplier (not upon the receipt of services by the recipient), but it falls to be paid by the recipient.
20. Article 9 is quite a complex article. In cases concerned with suppliers of services who do have business establishments there is a general rule in article 9.1, but an important exception in article 9.2. Within both the general rule for cases covered by article 9.1 and the rule in 9.2 for the exceptional cases there are, or may be, two alternatives, without the text of the Directive offering much in the way of guidance as to which alternative should apply in any individual case. I have quoted the relevant wordings of the two sub-articles in paragraph 16(ii) above.

i) The article 9.1 general rule is that the place of supply is determined by reference to the location (or a location) of the supplier rather than the location of the recipient. But the general rule specifies two alternative locations: (a) 'the place where the supplier has established his business' and (b) 'the place where the supplier … has a fixed establishment from which the service is supplied.' In the case of a business which only has one establishment, (a) and (b) will both produce the same result. In the case of a business which (like ZIC) has two or more establishments in different countries the answer will vary with the facts. The place within (a) is likely to be the country where the head office is located. If a business, as well as (a) having a head office in country A, also (b) has a fixed establishment in country B, and the service in question is supplied from the fixed establishment, the supply is made in country B. If a business has a fixed establishment in country B, but the service in question is not supplied from that establishment, the supply is made in country A. These concepts are explored to some extent in cases which I will consider in later paragraphs.

ii) Article 9.2 provides for the exceptions from the general rules in article 9.1. It contains five subparagraphs, (a), (b), (c), (e) and (f), which, for the various kinds of supplies that they cover, prescribe rules as to the place of supply which are different from the rules in paragraph 9.1. Subparagraph (e) is the relevant subparagraph for this case. Where it applies, the place of supply is derived, not from the location, or a location, of the supplier (which is the article 9.1 rule), but from the location, or a location, of the recipient. Article 9.2(e) contains several different indents. The one that matters is the third indent. It lists services of several kinds of suppliers, including 'services of consultants'. The place of supply of such services is prescribed by the opening part of article 9.2(e), which is quoted in paragraph 16(ii) above, and can be paraphrased for the purposes of this case as follows:

"The place where [services of consultants] are supplied when performed for customers established outside the Community [e.g. for ZIC, a customer established in Switzerland] … shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied … ."

The two alternative places of supply are: (a) the country where the customer has established his business, or (b) the country where the customer has a fixed establishment to which the service is supplied. In this case the services supplied were the consultancy services supplied by PwC AG. 'The customer' was ZIC. Alternative (a) for the place of supply was Switzerland, where ZIC is established (its head offices being there). Alternative (b) for the place of supply was the United Kingdom, where ZIC has a fixed establishment (in fact several fixed establishments), to which the PwC AG's services could be said to have been supplied. The terms of the Directive give little or no indication of how the choice between the two alternatives is to be made. There is, as far as I am aware, no case on the choice between the alternatives in article 9.2(e). But there are cases about the choice between the alternatives in article 9.1, and it is, I think, common ground (and I accept) that those cases provide guidance for article 9.2(e) as well as for article 9.1. I consider them in the next part of this judgment.

Some observations on the relevant provisions of the VATA

21. The United Kingdom statutory rules which affect this case are all contained in the VATA. They ought to implement the principles set out in the Sixth Directive (see paragraph 15 above), but they are in some respects differently worded from the Directive, and they do not operate in exactly the same way. VAT is charged on the supply of goods and services in the United Kingdom (s.1(1)(a)). That provision corresponds to article 2.1 of the Directive. But the place of supply rules are differently constructed, at least for supplies of services. Whereas in the case of the Directive the place of supply of services may be where the supplier is located or where the recipient is located, depending on whether article 9.1 or 9.2 applies, under s.7(10) of the VATA (reproduced in paragraph 18(ii) above) all supplies of services are treated as made where the supplier 'belongs'. That place is determined by reference to s.9(2) (see paragraph 18(iii) above), and depends on the location of his or its (the supplier's) business establishment or establishments. There is no rule in the VATA like article 9.2(e) of the Sixth Directive, under which supplies of certain services are taken to be made in the country where the recipient is established or has a fixed establishment.
22. Nor is there a rule which precisely tracks article 21.1(b) in requiring the recipient of services from an overseas supplier to pay the VAT which is chargeable on the making of the supply. However, the Act seeks to get to essentially the same result by the different route of the reverse charge provisions in s.8 (quoted in paragraph 18(iv) above). Where services of the kinds to which the section applies (and they include consultancy services) are supplied by a person who belongs in a country outside the United Kingdom to a recipient who belongs in the United Kingdom, the section imposes a liability to VAT on the recipient. Whereas the scheme of the directive is that the overseas supplier of the services has a liability to VAT but the United Kingdom recipient is required to pay the supplier's VAT, the scheme of s.8 is that the United Kingdom recipient of the services has the liability, and is liable to pay its own VAT. Conceptually the two approaches are different, but they work out in essentially the same way. Further, as long as the result of the domestic legislation is in accordance with what would be the result of the provisions in the Directive, it does not matter that the domestic legislation gets to that result by a different route. That is the effect of the third paragraph of article 249 of the EC Treaty:

"A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods."

23. It is worth noting that the reverse charge only really matters in a case where the United Kingdom-based recipient of services to which s.8 applies (for example consultancy services supplied by a non-United Kingdom supplier) itself makes supplies that are largely exempt, and so is able to recover only a small proportion of input tax suffered by it. If the recipient makes fully taxable supplies (or zero-rated supplies) and therefore can recover all its input tax, the reverse charge applies but is of no practical importance. The recipient is liable to pay output tax on the notional supply to itself which it is deemed by subsection (1) to have made ('as if the recipient had himself supplied the services in the United Kingdom in the course or furtherance of his business'), but is immediately entitled to an equal and opposite credit for input tax ('so much as … entitles a taxable person to credit for input tax'). Since, however, the United Kingdom branch of ZIC makes predominantly exempt supplies of insurance, a liability to pay VAT under the reverse charge would not be effectively neutralised by a matching credit for input tax. That is at root what this case is about.

ECJ cases on the place of supply rules in the Sixth Directive, article 9

24. I turn to the cases on article 9. It is sufficient at this point to refer to three of them.

i) Berkholz v Finanzhamt Hamburg-Mitte-Alstadt, Case 168/84, [1985] ECR 2251.

a) This case arose under article 9.1, and concerned the VAT position of the maker of supplies, not that of the recipient of supplies. A German businessman who undoubtedly had an establishment in Germany operated gaming machines on two boats that provided a ferry service in the Baltic Sea between a German port and a Danish port. The question was whether the takings of the gaming machines were wholly liable to German VAT (as the German VAT authority contended) on the ground that the supplies of services were deemed to be supplied in Germany under the first of the alternatives in article 9.1: 'the place where the supplier has established his business'. The opposing argument was that the second alternative in the sub-article applied: 'the place where … the supplier has a fixed establishment from which the service is supplied'. The argument was that the gaming machines on the ferries were a fixed establishment.

b) The ECJ does not itself decide cases, but only answers questions of Community law, on the basis of which the national court should decide the case. However, on the basis of the answers which the ECJ gave in the Berkholz case the outcome must have been that the German authority's claim for VAT was upheld. The court effectively found that the supplies were covered by the first alternative, so that they were taken to have been made wholly in Germany. I quote two passages from the decision.

"According to article 9.1, the place where the supplier has established his business is a primary point of reference inasmuch as regard is to be had to another establishment from which the services are supplied only if the reference to the place where the supplier has established his business does not lead to a rational result for tax purposes or creates a conflict with another Member State.

It appears from the context of the concepts employed in article 9 and from its aim, as stated above, that services cannot be deemed to be supplied at an establishment other than the place where the supplier has established his business unless that establishment is of a certain minimum size and both the human and technical resources necessary for the provision of the services are permanently present. It does not appear that the installation on board a sea-going ship of gaming machines, which are maintained intermittently, is capable of constituting such an establishment, especially if tax may appropriately be charged at the place where the operator of the machines has his permanent business establishment."

c) The first of the above paragraphs is the one to which some significance may attach in this case. It suggests that, where there is a choice between the place where the supplier has established its business and a fixed establishment elsewhere, the former is 'the primary point of reference'. In my view this may require some qualification in the light of subsequent cases where there actually was a fixed establishment elsewhere. In Berkholz the critical point was that there was no such fixed establishment. But in any event the country where the business is established should not be regarded as the place of supply of the service involved if to treat the supply as made there would not lead to 'a rational result for tax purposes'. (Tax in that context obviously means VAT, not the direct taxes on the profits of a business, like income tax or corporation tax in the United Kingdom.)

ii) Customs & Excise Commissioners v DFDS A/S, Case C-280/95,[1997] STC 384

a) This was a case about a tour operator which was a Danish company, presumably being established in Denmark, but which marketed its tours to members of the public through an agent in the United Kingdom. The agent was a United Kingdom company. It was in fact a subsidiary of the Danish company, but its subsidiary status was in my view irrelevant: the key point was that it acted as agent for the tour operator.

b) The case provides important guidance as to the operation of article 9.1 of the Sixth Directive, but strictly it arose, not under article 9.1, but under virtually identical wording contained in article 26. That article lays down a special scheme for travel agents and tour operators, whose services to any one customer may be provided in several different countries. There are obvious considerations of practicality making it desirable that there should be a rule under which for VAT all of their services to a customer are supplied in one country.

c) The rule is set out in article 26.1. It is expressed in terms of travel agents, but the last sentence of the sub-article provides that, in article 26, travel agents include tour operators. Substituting 'tour operators' for 'travel agents' the key provision is as follows:

"Article 26

Special scheme for tour operators

1. …

2. …All transactions performed by the tour operator in respect of a journey shall be treated as a single service supplied by the tour operator to the traveller. It shall be taxable in the Member State in which the tour operator has established his business or has a fixed establishment from which the tour operator has provided the services. …"

The wording of the last sentence in the above quotation is effectively the same as the wording in article 9.1: 'the place where the supplier has established his business or has a fixed establishment from which the service is supplied'.

d) Customs & Excise claimed that the Danish tour operator was liable to account for United Kingdom VAT on the basis that, under article 26.2, it was to be regarded as having provided services in the United Kingdom. The High Court referred certain questions to the ECJ.

e) The ECJ noted the similarity between article 26.2 and article 9.1, in view of which it summarised the decision in Berkholz. It then considered the specific questions referred to it, and indicated that the case was one in which, of the two alternative places of supply (the place where the taxable person was established and the place where it had a fixed establishment), the appropriate one to adopt was the second. Otherwise a rational result would not be produced; in particular it could lead to distortions of competition. The essence of the Court's reasoning is, I think, contained in the following extracts from paragraphs 21 to 24 of the decision.

"21. In this case, to treat, for tax purposes, all the services provided by a tour operator, including those supplied in other Member States through undertakings operating on his behalf, as being supplied from the place where the tour operator has established his business would have the clear advantage … of having a single place of taxation for all the business of that operator covered by Article 26 of the Sixth Directive.

22. However, that treatment would not lead to a rational result for tax purposes in that it takes no account of the actual place where the tours are marketed which, whatever the customer's destination, the national authorities have good reason to take into consideration as the most appropriate point of reference.

23. … [C]onsideration of the actual economic situation is a fundamental criterion for the application of the common VAT system. The alternative approach for determining the place of taxation of the services of travel agents, based on the fixed establishment from which these services are supplied is specifically intended to take account of the possible diversification of travel agents' activities in different places within the Community. Systematic reliance on the place where the supplier has established his business could in fact lead to distortions of competition … .

24. In those circumstances, it must be concluded that, where services have been provided by a tour operator from a fixed establishment which that operator has in a member state other than that in which he has established his business, such a supply of services to the customer is taxable in the state where that fixed establishment is located."

iii) RAL (Channel Islands) Ltd v Customs and Excise Commissioners, Case C-452/03; [2005] STC 1025.

a) This case was concerned with the place of supply of gaming machine services supplied by a company established in Guernsey (outside the Community) to associated companies in the United Kingdom. The company's principal case was that article 9.1 applied, and that under that sub-article the place of supply was Guernsey, the place where it had established its business. It contended that, on the basis that article 9.1 applied, the alternative in the sub-article (the place where the supplier has a fixed establishment from which the service is supplied) was not available, because it did not have a fixed establishment anywhere outside Guernsey and in particular did not have a fixed establishment in the United Kingdom.

b) The Tribunal dealt with the matter on the basis of article 9.1, but did not accept the company's contentions. It held that the gaming services were supplied by the Guernsey company from a fixed establishment in the United Kingdom, namely the premises of associated companies in which the gaming machines were located. The company appealed, and Customs & Excise cross-appealed against other aspects of the Tribunal's decision. The High Court judge did not decide the appeals himself, but instead referred certain questions to the ECJ. The questions did not specifically identify which sub-article of article 9 they related to, but it seems to me that they were essentially directed to article 9.1.

c) However, the ECJ decided the case on the relatively narrow ground that, contrary to the submissions of both the company and the United Kingdom government but in accordance with the submissions of two other Member States which had submitted observations, the place of supply was governed, not by article 9.1, but by one of the subparagraphs of article 9.2 The case presently before me involves article 9.2(e), as I have already explained, but one of the other subparagraphs is article 9.2(c), under which 'the place of supply of services relating to … entertainment or similar activities … shall be the place where those activities are physically carried out'. The effect of the ECJ's decision was that that provision applied to the circumstances in the RAL case.

d) In the circumstances the judgment was quite short, but I can usefully mention a few passages in it. The court points out that the object of article 9.1 and 9.2 'is to avoid, first, conflicts of jurisdiction and, secondly, non-taxation.' As regards the relationship between the two sub-articles: 'article 9.1 in no way takes precedence over article 9.2. In every situation, the question which arises is whether it is covered by one of the instances mentioned in article 9.2; if not it falls within the scope of article 9.1.' The court commented on its conclusion (that, under article 9.2(c), the test should be where the services were physically carried out) that it 'leads to a rational solution from the point of view of taxation since the services concerned are subject to the VAT regime of the member state in the territory of which the recipients of those services are established.'

e) The Advocate-General, in his opinion for the court, covered a number of matters which the court did not find it necessary to address. Some of his observations on these matters are instructive in the context of the present case. One was: 'It should be noted that the general principle in VAT is that it should be charged at the place of consumption.' (Paragraph 24 of his opinion). Expanding on the same theme he said in paragraph 30: 'The application of the connecting factor of the place where the activities are carried out is, moreover, far more in conformity with the general principle that VAT should be charged at the place of consumption. To the extent to which the determination of the place where the activities are performed (and consumed) does not give rise to any difficulties, … a return to the residual category of article 9.1 is not justifiable.' If, however, the court did consider that article 9.1 fell to be applied, he would have favoured determining the place of supply by reference to the fixed establishment rather than the place where the taxable person was established: 'Nothing, therefore, precludes the national authorities from applying the connecting factor of the fixed establishment when the option of the place of business would lead to irrational results.' (Paragraph 59, and see also paragraph 66.)

The position under the VATA apart from the Sixth Directive

25. Normally at this point in my judgment I would have expected to summarise the decision of the Tribunal before setting out my own analysis of the legal position. However, in this case it is sensible for me not to come to the decision of the Tribunal until I have set out how I consider that the United Kingdom legislation would have operated apart from the Directive. The reason is that the Tribunal says nothing about the domestic statute, but addresses only the position under the Directive. In my view the position under the domestic statute does need to be explained. It is, I believe, most helpful to do that now, and to defer summarising the Tribunal's decision until immediately before the part of my judgment when I consider the matters which it addressed.
26. Amplifying on why I consider that the position under the VATA has to be dealt with as part of my decision, I refer to paragraph 15 above, in which I make the point that the Sixth Directive does not itself impose VAT liabilities in Member States: it directs Member States to impose liabilities in accordance with the principles of the Directive, but taxable persons are liable to pay VAT in Member States, like the United Kingdom, because the domestic statute requires them to do so. In this case a necessary step to upholding the assessment is to demonstrate that, if the VATA stood alone unaffected by the Directive, ZIC would be liable for the VAT assessed upon it. If ZIC would not be liable to pay the VAT assessed under the VATA considered by itself, ZIC is not liable whatever the Directive might provide.
27. In my opinion, under the VATA by itself, ZIC would be liable. The assessments for the five periods under appeal were made under the reverse charge regime contained in ss.8 and 9 of the Act: that is clearly explained in the Decision Letter dated 30 September 2002 in which the assessing officer of Customs & Excise explained the reasons for the assessments which she had decided should be made. The provisions are set out in paragraph 18(iii) and (iv) above, to which reference should be made in connection with the following subparagraphs.

i) With reference to s.8(2), 'consultancy services' are one of the descriptions of services specified in Schedule 5. They are not specified in Schedule 9. Therefore they are 'relevant services'.

ii) With reference to s.8(1)(a), the consultancy services in this case were supplied by PwC AG. PwC AG was a person who belonged in a country other than the United Kingdom, namely Switzerland, within the terms of s.9(2)(a). This proposition is, I think, tacitly accepted by everyone.

iii) With reference to s.8(1)(b), the consultancy services were received by ZIC, and were certainly received by it for the purposes of a business carried on by it. For the paragraph to apply in this case ZIC had to be 'a person who belonged in the United Kingdom' In the case of a recipient of services which is a company the rules are contained in s.9(4). If the company has business establishments in more countries than one, it belongs, in relation to any particular receipt of services by it, in the country containing the establishment at which, or for the purposes of which, the services are most directly used or to be used: s.9(4)(b).

iv) In my judgment, on the facts of this case that country can only be the United Kingdom. I refer in this connection to paragraph 13 above, in which I set out various extracts from the decision or from documents which were before the Tribunal, showing that the SAP system (for the installation of which the consultancy services were received) was the top level computer system used in the operations of ZIC(UK). It is true that ZIC(HO) also had an important interest in getting the SAP system unstalled in ZIC's United Kingdom premises and activities, because it was a system compatible with Z-Core and gave ZIC(HO) ready access to the records of ZIC's United Kingdom operations. Nevertheless, to the question of whether the SAP system, for the installation of which the consultancy services of PwC AG were provided, was mainly to be used in the United Kingdom or in Switzerland the only conceivable answer is: in the United Kingdom.

v) I should mention for completeness that Mrs Hamilton did submit otherwise: she said that the services, and the SAP system, were to be mainly used in Switzerland. However, in my view that assertion cannot be right. It is worth adding that, if it was right, ZIC ought not to have agreed before the Tribunal (as the Tribunal records that it did agree) that the case depended solely on the place of supply rules under the Sixth Directive. If ZIC, as recipient of the consultancy services, had 'belonged' in Switzerland and not in the United Kingdom, there would have been no liability to United Kingdom VAT under the domestic statute, and the Sixth Directive would not have come into the matter at all.

vi) It follows from the analysis in the foregoing subparagraphs that ZIC, under the VATA considered without regard to the Sixth Directive, would be liable to pay VAT in accordance with the assessments made upon it (subject to finalisation of the detailed figures, which awaits the outcome of the present appeal).

28. Before I move on I should say something about how the matter stands when regard is had both to the VATA and to the Sixth Directive. For the reasons which I have set out in paragraph 15(ii) above, I believe the position to be as follows. If in accordance with the principles in the Sixth Directive ZIC would be liable to pay to the United Kingdom VAT of the same amount as it is liable to pay under the VATA, it remains so liable. (The point made at the end of paragraph 22 above about article 249 of the EC Treaty is relevant here.) If, however, under the Directive ZIC would not be liable to pay United Kingdom VAT at all (or would be liable to pay only a smaller amount), the Directive overrides the United Kingdom liability, which ceases to be payable (or is reduced to the lower amount which would be payable under the Directive).
29. Under the Directive United Kingdom VAT would be payable on the basis of a supply of services by PwC AG if, on the proper application of the place of supply rule in article 9.2(e), the services fall to be regarded as supplied in the United Kingdom. Further, ZIC would be liable to make the payment, by reason of article 21.1(b). However, under the Directive United Kingdom VAT would not be payable if article 9.2(e) had the effect of treating PwC AG's services as having been supplied in Switzerland. In that situation the Directive would remove the liability which would otherwise have arisen under ss.8 and 9 of the VATA. So in my opinion that is the reason why the place of supply rules in the Directive are critical in this case. If they mean that PwC AG's supply was made to ZIC in the United Kingdom they do not remove the liability to United Kingdom VAT which arises under ss.8 and 9. If they mean that the supply was made in Switzerland, they do.

The Tribunal's decision in this case

30. The Tribunal, in its decision, goes almost straightaway into what it understands the case to depend on, without explaining why the case depends on it. The first sentence of the decision is: 'This is an appeal by Zurich Insurance Company against an assessment to VAT dated 6 November 2002 for £2,085,153 in respect of periods 12/1999 to 12/2000.' The assessment was in fact made under the reverse charge provision in VATA s.8(1), but the Tribunal does not say so. Indeed, at no point does the Tribunal refer to any specific provision of the United Kingdom legislation. In paragraph 2 of the decision the Tribunal states what it considers the issue in the appeal to be: whether the place of supply of consultancy services by PwC AG to ZIC was Switzerland or the United Kingdom. It does not spell out why that is the issue. However, I hope that I have explained that matter in earlier paragraphs of this judgment, culminating in paragraph 29 above. After paragraphs describing the facts the Tribunal sets out article 9 of the Sixth Directive, followed by this:

"The relevant part is article 9(2)(e). We have included article 9(1) since this is relevant to the cases we consider. The issue is whether PwC AG's services, which it is common ground are consultancy services, were supplied at the place where the customer [the Appellant Company] has established [its] business [Zurich (HO) in Switzerland], or the place where it has a fixed establishment to which the service is supplied [Zurich (UK) in the UK]. It is common ground that we should decide the case on the basis of the Directive alone without regard to the VAT Act 1994." (The square brackets and the words in them are not interpolations by me. They appear in that form in the decision.)

31. The Tribunal summarises the contentions of the parties, and reviews the authorities, principally Berkholz and DFDS. There is also a brief reference to RAL. The Advocate-General in RAL had commended 'an analysis that is especially responsive to the factual economic and commercial reality of the case'. The Tribunal picked up that phrase, and said that, since ZIC(UK) undoubtedly had a fixed establishment with many thousands of employees there, it would apply 'the same approach based on economic reality, rather than apply a hierarchy.' (A 'hierarchy' would entail determining the place where a service is supplied simply by reference to where the supplier, in an article 9.1 case, or the recipient, in an article 9.2(e) case, is 'established', in preference to where the supplier or the recipient has a fixed establishment.) In this case article 9.2(e) applied, and it gave two possible places for where the customer (ZIC) received the supply of consultancy services from PwC AG: Switzerland where it (ZIC) was established or the United Kingdom where it had a fixed establishment. The Tribunal said that it must 'choose between the two possibilities on the basis of rationality, economic reality and distortion of competition'. After discussion, which I will summarise in the next few paragraphs, the choice that it made between those two possibilities was that the supply was made to ZIC in Switzerland, not in the United Kingdom.
32. As regards economic reality the Tribunal considered the place of contracting, the location which bore the cost, what was actually done, and the establishment for the benefit of which the work was done. It considered that the place of contracting was Switzerland, either on the basis that there was an earlier 'framework' agreement between ZIC(HO) and PwC AG for PwC AG to provide consultancy services generally to ZIC, or (more relevantly in my view) because the individual Work Orders, pursuant to which the services that are the subject matter of the VAT assessments were actually provided, though negotiated by personnel of ZIC(UK), had to be accepted by ZIC(HO) before they became contractually binding. The location which bore the cost was originally intended to be ZIC(HO), but later became ZIC(UK). What was done was done in the United Kingdom, not in Switzerland. The work was done for the benefit both of ZIC(UK) and ZIC(HO). The Tribunal considered that, of those factors, the most important one was the place of contracting. So its tentative conclusion was that the supply was made to ZIC(HO), not to ZIC(UK), but it said that it was then going to test the conclusion for 'rationality and distortion of competition'. The Tribunal set out to do that in paragraph 24 of its decision. It made observations about rationality which I find difficult to understand. It appears to me to have said nothing about distortion of competition.
33. The Tribunal then indicated that it did not accept an argument which Mr Pleming had advanced based on the 'cost components' concept (which I will explain later). Nor did it consider that arguments based on the corporation tax treatment of the costs were relevant.
34. Accordingly, it concluded that the supply of consultancy services by PwC AG was made to ZIC(HO), and that ZIC(UK) was not a 'fixed establishment to which the service is supplied' (words taken from article 9.2(e)). The Tribunal concluded that Switzerland, not the United Kingdom, was the place of supply.

Analysis and discussion: the place of supply of PwC AG's services under article 9.2(e) of the Sixth Directive

35. I preface the discussion that follows by saying this. (1) If under article 9.2(e) PwC AG's services are taken to have been supplied to ZIC in Switzerland, the decision of the Tribunal is correct, and HMRC's appeal fails. (2) If under article 9.2(e) PwC AG's services are taken to have been supplied to ZIC in the United Kingdom, the decision of the Tribunal is wrong, and HMRC's appeal succeeds.
36. I begin my discussion of the question by repeating a paraphrase of article 9.2(e) as it falls to be applied in this case, interpolating as I do so references to the specific facts which are relevant:

"The place where consultancy services [viz. the consultancy services of PwC AG] are supplied when performed for customers established outside the Community [for ZIC, which is established in Switzerland] … shall be the place where the customer [ZIC] has established [its] business [Switzerland] or has a fixed establishment to which the service is supplied."

Before I evaluate the analysis of the Tribunal I will state the essential element of how I would approach article 9.2(e) in the context of this case. The subparagraph gives two possibilities: (1) the place where ZIC has established its business, or (2) the place where ZIC has a fixed establishment to which the service is supplied. The first question is: which of those two possibilities should be adopted? It is first necessary to ask whether possibility (2) exists on the facts. That is, does ZIC have a fixed establishment elsewhere than where it (ZIC) is established, and was the supply of services made to that fixed establishment? If ZIC does not have a fixed establishment elsewhere or, although it does, the supply of services was not made to it at that establishment, the place of supply will be possibility (1): the place where ZIC has established its business, namely Switzerland. There would be no other possibility. The case would be analogous to Berkholz, in which the taxable person was established in Germany and did not have a fixed establishment anywhere else (the gaming machines on the ferries not being a fixed establishment). If, however, ZIC has a fixed establishment elsewhere than in Switzerland (which it obviously does), and if the services are supplied to that establishment (which is the critical disputed issue), then in my view the place of supply will be where the establishment is located.

37. There is a slight variant, which seems to correspond to the Tribunal's finding in this case. Assume (realistically) that ZIC has a fixed establishment in its home jurisdiction (Switzerland), and also has a fixed establishment in the United Kingdom. It is necessary to ask: to which of the two establishments were the services of PwC AG supplied? If they were supplied to the Swiss establishment, the place of supply would be Switzerland. That could be on the theoretical basis that the case falls back to the first of the two possibilities ('where the customer has established its business'). Or it could be on the basis that the second possibility applies ('where the customer has a fixed establishment to which the service is supplied'), but the second possibility requires a decision as to which was the establishment to which PwC AG's services were supplied, and the decision goes in favour of the Swiss establishment. That seems to me to be the way that the Tribunal viewed the matter. Its decision was that as a matter of economic reality the services of PwC AG were supplied to ZIC at its head office, not to ZIC at its fixed establishment or establishments in the United Kingdom.
38. I agree with the Tribunal's approach up to a point: I agree that it was appropriate to ask whether PwC AG's services were supplied to ZIC at its head office, or to ZIC at its United Kingdom establishment. However, I cannot agree with the answer which the Tribunal gave to the question. In my view, on the facts of this case, the only tenable answer to the question is that the services were supplied to ZIC at its United Kingdom establishments. I respectfully disagree with the Tribunal that the most important consideration was the place at which the contract for the services to be supplied was made. VAT is not charged on the supply of the service of making a contract for services. It is charged on the supply of the services which have been contracted to be supplied.
39. When a Work Order was signed ZIC thereby contracted with PwC AG for PwC AG to provide consultancy services to ZIC's United Kingdom establishment. I can accept that PwC AG and ZIC made that contract in Switzerland. I can also accept that it was the sort of contract as respects which the head office in Switzerland would, for commercial reasons, want to be involved in the final decision to enter into it, rather than leaving that decision to the United Kingdom establishment alone. But PwC AG did not provide or supply the consultancy services to ZIC at ZIC's head office by making a contract to provide or supply them. It provided or supplied the services by performing its contract after it had made it. And it performed the contract wholly, or virtually wholly, in the United Kingdom. It performed it through a sub-contractor, PwC(UK), and PwC(UK) fulfilled PwC AG's contractual obligations entirely in the United Kingdom. PwC(UK) sent its specialist personnel to ZIC's offices, and it was there that the services which ZIC had contracted for were supplied by (or on behalf of) PwC AG and received by ZIC. In this connection the facts found by the Tribunal are in paragraph 5(19) of the decision:

"(19) The implementation of SAP by Zurich (UK) was carried out partly by Zurich (UK) staff (60% of the staff, although originally it had been expected to be 75%) and partly by PwC(UK) (40% of the staff) working as a team in Zurich (UK) premises. At the height there were 165 staff working on the project in the UK."

40. I accept that, when PwC AG performed the contract by means of what the staff of its subcontractor, PwC(UK), did at ZIC(UK)'s premises in the United Kingdom, there was a sense in which it (PwC AG) provided a service to ZIC(HO) as well as providing a service to ZIC(UK): it provided to ZIC(HO) the service of doing what it had contracted with ZIC(HO) that it would do. The Tribunal, in paragraph 23 of its decision, draws an analogy with the circumstances in Customs & Excise Commissioners v Redrow Group plc [1999] STC 161, in which a first party contracted with a second party that the second party would, in consideration of payment from the first party, provide a service to a third party. There was a supply of services to the first party, which was entitled to input tax credit for the VAT content of what it had paid to the second party. The analogy is apt in some ways, but it does not change my view. It remains the case that what the head office of ZIC wanted was to get the SAP system installed into the operations of ZIC's establishment in the United Kingdom. It was in order to secure that result that ZIC engaged PwC AG to provide its consultancy services. That result is what ZIC got, and in my view the actual provision of the services to ZIC in the United Kingdom far outweighs in importance the feature that the contract which PwC AG thereby performed in the United Kingdom had been made with ZIC(HO) in Switzerland. In reality the fixed establishment of ZIC 'to which the service [was] supplied' (echoing the words of article 9.2(e)) was its establishment in the United Kingdom, and not its head office in Switzerland.
41. What I have said in the last few paragraphs is, to my mind, the point of transcending importance in this case, and the foremost reason why in my view the decision of the Tribunal cannot stand. But there are other considerations which, in my opinion, all lead to the same conclusion. I mention them in the following paragraphs.
42. In paragraph 22 of the decision the Tribunal says that in its view the work was done for the benefit of both establishments: the head office establishment as well as the United Kingdom establishment. That is true in the sense that any head office of a business with branches located away from the head office will want its branches to be adequately equipped and organised, and will also want to have efficient access to information about the business which is going on in the branches. But that does not, in my opinion, change the position. The critical point is that, so far as the Work Orders relevant to this case are concerned, PwC AG was engaged to consult on the installation of the new SAP system in the premises and operations of ZIC(UK), not in the premises and operations of ZIC(HO). Of course ZIC(HO) would have wanted to be sure that the system was a good one and that it was efficiently installed. Also ZIC(HO) had a particular concern that the SAP system installed in the United Kingdom should be compatible with ZIC's Z-Core template. But the operation was still one for the installation of a new system in the United Kingdom establishments, not in the head office establishment in Switzerland.
43. In paragraph 24 of the decision the Tribunal says, in relation to its tentative conclusion that PwC AG's supply of services was made to ZIC(HO), that it will 'test it for rationality and distortion of competition'. As regards rationality, the word 'rational' is used in most of the ECJ cases which have been concerned with the place of supply of services. The court consistently links rationality in this context with the avoidance of conflicts of jurisdiction, of double taxation, and of non-taxation. I have already quoted, but I will repeat, passages to that effect in the judgments of the court.

"Article 9 is designed to secure the rational delimitation of the respective areas covered by national value added tax rules … The object of those provisions is to avoid, first, conflicts of jurisdiction, which may result in double taxation, and secondly, non-taxation …"(Berholz, paragraph 14

"… regard is to be had to another establishment from which the services are supplied only if the reference to the place where the supplier has established his business does not lead to a rational result for tax purposes …" (ibid. paragraph 17)

"However … that treatment would not lead to a rational result for tax purposes …" (DFDS paragraph 22)

"Finally, application of such a rule leads to a rational solution from the point of view of taxation since the services concerned are subject to the VAT regime of the Member State in the territory of which the recipients of the services are established." (RAL paragraph 33)"

44. I assume that in paragraph 24 of its decision the Tribunal is seeking to demonstrate that it would be rational to treat the services in this case as having been supplied in Switzerland rather than in the United Kingdom. However, I have to say that I cannot see how the paragraph demonstrates any such thing. In part it focuses on an example which appears in the opinion of the Advocate-General in DFDS. It is not apparent to me what that has to do with the arguments about rationality.
45. Towards the end of the same paragraph, paragraph 24, the Tribunal says of this case that 'on the approach in DFDS the supply was made to ZIC(HO)'. That seems to me to be a highly questionable assertion, and in any event I cannot see what it has to do with what, according to the beginning of the paragraph, was going to be an exercise of testing for rationality the conclusion that PwC AG's services were supplied to ZIC at its head office. It is a mere assertion that the conclusion is correct, rather than any sort of testing of it. At the end of the paragraph the Tribunal writes: 'The reason why there is no tax in the United Kingdom is that there is no tax on the transfer of the services between a head office and a branch …' I refrain from debating the validity of that proposition, but I do ask: What has it to do with rationality? Perhaps the suggestion is that, although it is irrational that there should be no charge to United Kingdom VAT in this case, the irrationality lies in the absence of a charge on quasi-supplies by one part of a company to another part of the same company. If that is the suggestion, I do not agree with it.
46. At the beginning of paragraph 24 the Tribunal wrote that it would also test its tentative conclusion for distortion of competition. However, as I read the paragraph it says nothing at all about distortion of competition.
47. In my judgment the factors which the ECJ has had in mind in its frequent references in this context to a rational approach or a rational result are avoidance of double taxation, avoidance of non-taxation and avoidance or prevention of distortion of competition. The Court of Appeal in this country has recently emphasised the importance of those concepts:

"In my judgment the principles of avoidance of non-taxation, avoidance of double taxation and the prevention of the distortion of competition are general principles of the Sixth Directive." (Arden LJ in HMRC v IDT Card Services Ireland [2006] EWCA Civ 29, at paragraph 95)

48. Double taxation would arise if there were overlapping claims for VAT in two or more Member States. It is not directly an issue in this case.
49. In relation to non-taxation the point is that, if services are 'consumed' in the Community they should be subject to a VAT charge. (As to the concept of services being 'consumed' see the observations of the Advocate General in the RAL case which I quote in paragraph 24(iii)(c) above.) In my judgment the services of PwC AG which this case is about were consumed in the Community (specifically in the United Kingdom) to a much greater extent than they were consumed outside the Community in Switzerland. There can be cases where non-taxation inevitably arises, and if so the non-taxation result must follow. For and example see Commission v French Republic, Case C-429/97, [2001] STC 156 at 172, paragraphs 51 and 52. However, this is not such a case.
50. As regards distortion of competition, ZIC's United Kingdom establishment competes with other insurance enterprises doing business in this country, most of which are United Kingdom companies. If a competitor replaced the whole of its top level computerised system and used the services of a consultant to do so, it would expect to be charged VAT on the consultancy fees, and would be able to recover only a small proportion of the VAT. For ZIC(UK) to be able to replace its computerised system without a VAT charge is a manifest distortion of competition.
51. In my judgment the conclusion that PwC AG's services were supplied to ZIC's fixed establishment in the United Kingdom is not just the only tenable conclusion on the facts. It is also the conclusion which produces a rational result, which avoids non-taxation in a case where there ought to be taxation, and which avoids distortion of competition.
52. Before the Tribunal Mr Pleming advanced on behalf of HMRC a 'cost components' argument, deriving from words which appear in the 1^st VAT Directive. The Tribunal did not attach significance to the argument. I do not regard it as a major point in the case, but I think that there is some force in it. The basic concept is that, if a person carrying on a business buys in goods or services at a price which includes VAT (input tax, in the terminology used in our legislation), the cost of the goods or services is a cost component of his business; if he makes fully taxable supplies in the course of his business he can recover from HMRC the VAT input tax charged to him on his cost components; if he makes supplies which are mostly exempt supplies (like supplies of insurance) he can only recover a small part of the input VAT charged to him on his cost components. If ZIC had obtained the consultancy services from a United Kingdom supplier, which would have added VAT to its invoices, the invoices, including the VAT element in them, would have been cost components of ZIC's business, and ZIC could only have recovered a small proportion of the input tax. But what if ZIC instead obtained the services from a non-United Kingdom supplier which did not add VAT to its invoices? Without more there would be an inequality of treatment, and in my view a main purpose of the reverse charge is to create equality of treatment. That purpose is fulfilled if the reverse charge applies in this case (which it does if the supply of PwC AG's services was located in the United Kingdom under article 9.2(e)), but is not fulfilled if it does not.
53. I move to another point. Before the Tribunal HMRC sought to rely on things which had been said on behalf of ZIC(UK) to the Inspector of Taxes in relation to its corporation tax position. The Tribunal did not see any relevance in this, and referred in support of its view to the permanent establishment article of the Double Taxation Agreement between the United Kingdom and Switzerland. On this matter also I think that there was more in the point that HMRC made than the Tribunal recognised. Of course the statutory rules of corporation tax (which include relevant provisions of Double Taxation Agreements) are altogether different from the statutory rules of VAT. Arguments advanced by ZIC(UK) about the meaning of an article in the Double Taxation Agreement could not realistically be used against ZIC on an appeal about the meaning of provisions in the VATA or the Sixth Directive. But that does not mean that facts presented by ZIC(UK) to the Inspector of Taxes cannot be relevant to factual issues which affect ZIC's VAT position.
54. In 2002 ZIC(UK)'s tax department was claiming corporation tax deductions for ZIC's expenditure incurred in 2000 on installation of the SAP system. In a letter of 11 September 2002 the Inspector of Taxes asked:

"Did the implementation of the SAP system relate only to the UK business? If not how were the costs allocated between the branch and the home office?"

The immediate reply did not directly answer the Inspector's first question, although I think that the implication was that the answer was yes. In any event, in a later letter of 21 May 2004 ZIC(UK)'s tax manager wrote to the Inspector:

"The whole of the £16.7m cost represented the costs incurred for the purposes of the Branch. None of this was recharged to Home Office."

The outcome was that ZIC(UK) obtained (and, as it seems to me, rightly obtained) corporation tax reliefs for the costs of the project. Those costs included the consultancy fees payable to PwC AG. Against the background of that outcome and the letter which was written to the Inspector it is, to put it at its lowest, difficult for ZIC to maintain for VAT purposes that the consultancy services were provided, not to the United Kingdom establishment, but to the head office in Switzerland.

55. There are two other points which I wish to add. First, I have already said that for Work Order 1 the contract for consultancy services was with PwC(UK), not with PwC AG. ZIC (or its service company) received invoices from PwC(UK), and the invoices included 17.5% for United Kingdom VAT. I have little doubt that the invoices were paid and that ZIC (or the group representative member) claimed input tax credit for the small recoverable proportion of the 17.5% which qualified for credit. It did that on the basis that the services were received for the purposes of its business. When it came to later Work Orders (the ones relevant to this appeal) the contractual and invoicing structure was different, but the position on the ground, so to speak, was the same: the same people were doing the same sort of work in the same locations in pursuance of the same project (which was the installation of the SAP system into the operations of ZIC's United Kingdom establishment). It would, in my view, be unreal to say that what PwC(UK)'s staff did constituted the supply of services to ZIC(UK) (and not to ZIC(HO)) in the first phase, yet it constituted the supply of services to ZIC(HO) (and not to ZIC(UK)) in the later phases. The services were still in reality the same services, and in practice the work was still done by staff of PwC(UK). Although the services were now provided by the staff of PwC(UK) on a different contractual basis, they were still in reality services for ZIC in its ZIC(UK) capacity. In my judgment they were still, in terms of article 9.2(e), supplied to ZIC's fixed establishment in the United Kingdom.
56. Second, some of the work which the staff of PwC(UK) did was referable not to ZIC's branch operations in the United Kingdom (that is to ZIC(UK)), but rather was referable to United Kingdom subsidiaries of ZIC. It was, however, all part of the same single project, and it was all covered by the invoices from PwC AG to ZIC: the invoices were not split between invoices for work relating to ZIC(UK)'s establishments and operations in the United Kingdom and work relating to ZIC subsidiaries' establishments and operations in the United Kingdom. ZIC estimated that 21% of the work was attributable to subsidiaries, and ZIC(HO) made inter-company charges on its subsidiaries equal to 21% of the invoices which it received from PwC AG. ZIC paid United Kingdom VAT by reference to that 21%. That effectively acknowledged that part of the work done by PwC AG (through its sub-contracting team) was work for the operations of the United Kingdom subsidiaries of ZIC rather than work for ZIC(HO). I find it difficult to see how ZIC can logically contend that the rest of the work done by the same sub-contracting team as part of the same single project was work for ZIC(HO), and not work for the operations of ZIC(UK).

Conclusion

57. I fear that this judgment has been too long already. However, it has now come to an end. I have no other specific points to make. For the reasons which I have explained, I consider that on a proper application of the place of supply rule in the Sixth Directive article 9.2(e) PwC AG's supplies were made to ZIC's establishment in the United Kingdom. It follows that the result of applying the reverse charge provision in VATA s.8 is the same as the result required to be brought about by the Directive. Accordingly I allow this appeal in principle. Figures remain to be agreed.