England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		20 May 2009

Mr. Justice Lewison:

1. Mr Arachchige runs a shop at 192B West Hendon Broadway. Among the things that he sells in that shop are phone cards. He sells a variety of phone cards. Some provide cheaper calls to European destinations, others to Asian destinations and others to African destinations. They are bought by people who have relatives or contacts in those areas. The phone cards generally bear face values of £3 or £5. They are sold for their face value or a slightly lesser amount. Mr Arachchige buys each phone card for about 10p or 20p less than the amount for which he sells it. The vendors of the phone cards come to his shop every day. Mr Arachchige would accept a batch of cards and the vendor would return at the end of the day to collect monies equal to the agreed purchase price of the cards that had been sold. This issue on this appeal is the correct VAT treatment of Mr Arachchige's supply of such cards.
2. The VAT & Duties Tribunal (Chairman Mr Charles Hellier) decided that although Mr Arachchige both bought and sold phone cards in West Hendon Broadway, some of those supplies fell to be treated as if they had been supplied in other member states of the EU and were thus outside the scope of VAT chargeable in the UK. Her Majesty's Revenue & Customs ("HMRC") appeal.
3. The Tribunal described the way in which the phone cards worked as follows (§ 42). In order to use a phone card he or she has purchased, the holder must scrape off the covering of a PIN on the reverse of the card. The card also bears a phone number. The holder dials that phone number followed by the PIN, and then the full number of the destination he or she wishes to call. The call arrives at the receiver of the card phone number. At that location there will be a piece of equipment called a `Switch'. The switch records the use of the card and redirects the call. The call will be directed so that for the period of the call use will be made of telephone line capacity acquired or paid for by a person involved in the operation of the cards. The switch device will either be owned by the issuer of the card (or rented by the issuer on a long term basis) or be owned (or rented) by a sister company of the issuer. The issuer of the card will not own the line over which the call reaches the switch (that will generally be a BT line) or the line along which the call travels to its final destination but will have acquired the right to use time on the lines on which the onward travel takes place. All the switch devices for cards sold in the UK were located in the UK. Generally cards sold in the UK were for use by someone using a telephone in the UK and could not be used from outside the UK.
4. Until recently the EU framework for turnover taxes was the Sixth Council Directive (77/388/EC). Although that directive was initially adopted in 1977, it has been amended many times. In particular it was amended in 1999 so as to bring international telecommunication services within its scope. This was achieved by Council Directive 1999/59/EC of 17 June 1999. One of the recited purposes of the amendment was that:

"action should be taken to ensure, in particular, that telecommunications services used by customers established in the Community are taxed in the Community."

5. The amendments to the Sixth Directive principally related to the rules governing the place of supply. These are contained in Article 9. The relevant parts of that article are as follows:

"1. The place where a service is supplied shall be deemed to be the place where the supplier has established his 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:

…

(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:

…

Telecommunications. Telecommunications services shall be deemed to be services relating to the transmission, emission or reception of signals, writing, images and sounds or information of any nature by wire, radio, optical or other electromagnetic systems, including the related transfer or assignment of the right to use capacity for such transmission, emission or reception. Telecommunications services within the meaning of this provision shall also include provision of access to global information networks.

…

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 2 (e) and the hiring out of movable tangible property 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 take 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.

4. In the case of telecommunications services referred to in paragraph 2(e) supplied by a taxable person established outside the Community to non-taxable persons established inside the Community, Member States shall make use of paragraph 3(b)."

6. Article 9 (so far as relevant to this appeal) has been recast as articles 43, 56, 58 and 59 of the recast directive (2006/112/EC of 28 November 2006).
7. The United Kingdom's obligations under the directive are transposed into domestic legislation by the Value Added Tax Act 1994 ("VATA") and subordinate legislation made under it. VAT is charged on the supply of goods or services in the United Kingdom: VATA s. 1 (1). The VAT on any supply of goods or services is a liability of the person making the supply: VATA s. 1 (2). VAT is charged on the supply of goods or services by reference to the value of the supply: VATA s. 2 (1). Supply includes all forms of supply, but not anything done otherwise than for a consideration; and anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services: VATA s. 5 (2). Section 7 of VATA determines the place of supply. Section 7 (10) states:

"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."

8. The Treasury may by order vary this rule in relation to goods or services generally or to particular goods or services specified in the order: VATA s. 7 (11). A supplier of services is treated as belonging in a country if he has there a business establishment or some other fixed establishment and no such establishment elsewhere: VATA s. 9 (2).
9. Although the general rule is that liability for VAT is imposed on the supplier, special rules apply in the case of certain services (including telecommunications services) received from abroad. In such a case where the services (a) are supplied by a person who belongs in a country other than the United Kingdom, and (b) are 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 follow 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: VATA s. 8 (1); Sched 5 para 7A. In particular the recipient is liable for VAT on the supply and is entitled to credit for input tax.
10. The rule that VAT is charged on the value of the supply led to problems where the supply was a supply of a voucher. In its original form the legislation levied no charge on the issue of a voucher (unless the voucher was sold for more than its face value), but levied VAT when the voucher was redeemed. This led to the question: if a voucher is sold for less than its face value, is VAT payable when the voucher is redeemed for the actual discounted price for which the voucher was sold, or on its full face value? In Argos Distributors Ltd. v Customs and Excise Commissioners [1997] QB 499 the ECJ held that VAT was chargeable only on the discounted price. As a result of this decision changes were made to the domestic legislation in the Budget of 2003. These changes introduced Schedule 10A to VATA.
11. Schedule 10A applies to a "face value voucher". This is defined as "a token, stamp or voucher (whether in physical or electronic form) that represents a right to receive goods or services to the value of an amount stated on it or recorded in it": VATA Sched 10A para 1 (1). Paragraph 2 provides:

"The issue of a face-value voucher, or any subsequent supply of it, is a supply of services for the purposes of this Act."

12. The Act thus distinguishes between two kinds of supply: (a) the initial issue of a voucher and (b) a subsequent supply of it. In Mr Arachchige's case we are concerned only with subsequent supplies of vouchers already issued. The Schedule also distinguishes between two kinds of voucher: a credit voucher and a retailer voucher. (It deals with postage stamps too, but these are irrelevant to this appeal).
13. Credit vouchers are dealt with by paragraph 3 which provides:

"(1) This paragraph applies to a face-value voucher issued by a person who—

(a) is not a person from whom goods or services may be obtained by the use of the voucher, and

(b) undertakes to give complete or partial reimbursement to any such person from whom goods or services are so obtained.

Such a voucher is referred to in this Schedule as a "credit voucher".

(2) The consideration for any supply of a credit voucher shall be disregarded for the purposes of this Act except to the extent (if any) that it exceeds the face value of the voucher.

(3) Sub-paragraph (2) above does not apply if any of the persons from whom goods or services are obtained by the use of the voucher fails to account for any of the VAT due on the supply of those goods or services to the person using the voucher to obtain them."

14. Retailer vouchers are dealt with by paragraph 4 which provides:

"(1) This paragraph applies to a face-value voucher issued by a person who—

(a) is a person from whom goods or services may be obtained by the use of the voucher, and

(b) if there are other such persons, undertakes to give complete or partial reimbursement to those from whom goods or services are so obtained.

Such a voucher is referred to in this Schedule as a "retailer voucher".

(2) The consideration for the issue of a retailer voucher shall be disregarded for the purposes of this Act except to the extent (if any) that it exceeds the face value of the voucher.

(3) Sub-paragraph (2) above does not apply if—

(a) the voucher is used to obtain goods or services from a person other than the issuer, and

(b) that person fails to account for any of the VAT due on the supply of those goods or services to the person using the voucher to obtain them.

(4) Any supply of a retailer voucher subsequent to the issue of it shall be treated in the same way as the supply of a voucher to which paragraph 6 below applies."

15. Paragraph 6 provides:

"(1) This paragraph applies to a face-value voucher that is not a credit voucher, a retailer voucher or a postage stamp.

(2) A supply of such a voucher is chargeable at the rate in force under section 2(1) (standard rate) except where sub-paragraph (3), (4) or (5) below applies.

(3) Where the voucher is one that can only be used to obtain goods or services in one particular non-standard rate category, the supply of the voucher falls in that category.

(4) Where the voucher is used to obtain goods or services all of which fall in one particular non-standard rate category, the supply of the voucher falls in that category.

(5) Where the voucher is used to obtain goods or services in a number of different rate categories—

(a) the supply of the voucher shall be treated as that many different supplies, each falling in the category in question, and

(b) the value of each of those supplies shall be determined on a just and reasonable basis."

16. There are a few points to be noted at this stage:

i) Whether a voucher is a credit voucher or a retailer voucher depends on who issues it. It does not depend on who supplies it to the end-user. Thus although Mr Arachchige did not himself issue any vouchers, some of the vouchers that he supplied to his customers were credit vouchers and others were retailer vouchers.

ii) The touchstone for deciding whether a voucher is a credit voucher or a retailer voucher is whether the issuer can himself supply the goods or services to which the voucher relates. In some cases this will be obvious. For example a gift token issued by a department store redeemable only at that store will plainly be a retailer voucher. A gift token issued by a retailer (e.g. a garden centre) and redeemable either at that garden centre or another garden centre will likewise be a retailer voucher. Other forms of voucher are less obvious. In the case of a book token, for instance, although most people buy them in bookshops, they are not in fact issued by bookshops. They are, therefore, credit vouchers. And in the case of something like a phone card, it will be very difficult for someone in the position of Mr Arachchige to know whether any particular phone card is a credit voucher or a retailer voucher. He might have to undertake an investigation into the services that the issuer of the voucher is able to provide. This matters because of the different tax treatment of the two kinds of voucher.

iii) If a voucher is a credit voucher, then the consideration for the voucher is disregarded (except to the extent that it exceeds the face value), both on the issue of the voucher and on any subsequent supply of it. Thus a person in Mr Arachchige's position who deals in phone cards that are credit vouchers need not pay VAT, as long as he buys and sells them for less than their face value (which will almost always be the case). There is an exception to this, which I will consider more fully in due course, where the person who ultimately provides the goods or services does not account for VAT. In such a case, Mr Arachchige would be liable for VAT.

iv) However, if a voucher is a retailer voucher then the consideration is only disregarded on the initial issue of the voucher. Any subsequent supply of the voucher is dealt with under Schedule 10A paragraph 6. In Mr Arachchige's case the phone cards can only be used to obtain telecoms services which are standard rated. Thus Mr Arachchige's supply of phone cards is, on the face of it, chargeable at the standard rate. The other side of the coin, of course, is that he can deduct input tax on the amount that he himself paid for the phone cards.

17. This is the position that HMRC take. They say that Mr Arachchige is liable for VAT on the supply of all the retailer vouchers that he supplied in the periods of assessment under appeal. The Tribunal held that HMRC were only partly right. They decided that whether the cards were credit vouchers or retailer vouchers Mr Arachchige's supply was only VATable if either the supplier of the telecoms service belonged in the UK or if he belonged outside the EU. If the supplier of the telecoms service belonged in a different member state within the EU, then Mr Arachchige's supply was not VATable (or at least not VAtable within the UK). Intuitively this seems a surprising result. Mr Arachchige bought and sold phone cards in West Hendon Broadway. His customers used their phone cards in the United Kingdom and the "switch" to which their phone cards entitled them were likewise situated within the United Kingdom. Why, then, should Mr Arachchige be treated for the purposes of VAT as if he had made supplies in, say, Spain or Poland?
18. The Tribunal based its decision on its interpretation of article 21 (1) of the Value Added Tax (Place of Supply of Services) Order 1992. The version that they considered (correctly) was the version in force at the time of the supplies giving rise to the disputed assessment, rather than the amended version that came into force on 1 August 2006. Before turning to its details I need to consider the decision of the Court of Appeal in Revenue and Customs Commissioners v IDT Card Services Ireland Ltd [2006] STC 1252 ("IDT").
19. Rather simplified, the facts in IDT were as follows. IDT was an Irish company that issued phone cards and sold them to UK distributors and retailers. However, it did not supply telecoms services itself. They were supplied by Interdirect, another Irish company. Under the Irish VAT rules, VAT was charged on the supply of phone cards to end users (wherever situated) or to traders in Ireland. But phone cards supplied to traders outside Ireland did not attract VAT. Since the Irish tax authorities regarded the payment for a phone card as being a prepayment for the supply of telecoms services, no VAT was payable when the phone cards were redeemed. However, in the United Kingdom, the tax treatment was different. The phone cards in question were credit vouchers (because IDT was the issuer, but Interdirect was the ultimate supplier of the telecoms services). Accordingly under paragraph 3 (2) of Schedule 10A, the consideration for the phone cards was disregarded. Under the United Kingdom rules VAT would be payable when the phone cards were redeemed. However, because of the United Kingdom place of supply rules, the supply of telecoms services to private persons takes place where the supplier belongs. And the supplier, Interdirect, belonged in Ireland. Accordingly, if IDT supplied a phone card to a UK trader entitling the holder of the card to telecoms services provided by Interdirect, VAT was not payable either when the phone card was issued (or subsequently supplied) or when it was subsequently redeemed. On a literal application of the two VAT systems, IDT had found a VAT-free world.
20. In the Court of Appeal Arden LJ gave the leading judgment (with which Latham LJ agreed). Pill LJ gave a judgment of his own agreeing in the result, but not with all of Arden LJ's reasoning. However, since Latham LJ simply agreed with her judgment, that judgment is the authoritative judgment of the Court of Appeal and binds me. For present purposes, the relevant points are the following:

i) Turnover tax across the EU is intended to be a coherent system; and the coherence can be maintained provided that, if tax is not paid on the issue of a voucher in one member state it is paid on the supply of the voucher or the services for which it is redeemed in another member state (§ 4);

ii) If the phone cards issued by IDT had been retailer vouchers there would have been no question but that the supply in the United Kingdom by distributors to members of the public would have attracted VAT (§ 13);

iii) 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 (§ 95). Arden LJ expanded on this:

"One of the objectives of the directive is the harmonisation of rules on turnover taxes … and the Directive contains mandatory rules as to which supplies shall be taxable and where those supplies are deemed to take place. It must follow from these provisions that one of the objectives of the Directive is to prevent situations arising in which a taxable supply escapes taxation because it is not caught by the legislation of member states. I therefore reject Mr Lasok's submission that VAT is simply a territorial tax and if one member state fails to impose VAT that cannot result in the imposition of VAT by another member state: as I see it, it is a necessary corollary of the principle of non-taxation, as this case shows, that this can occur."

iv) If neither the issue of phone cards for Interdirect's telecoms services nor the supply of those services to persons within the EU is subject to VAT the principle of avoidance of non-taxation is infringed (§ 99);

v) This conclusion is not altered by the place of supply rules (§§ 102-107);

vi) In applying the place of supply rules, the issue of a phone card is no more than a promise to make telecoms services available or to procure that they are made available, and therefore itself constitutes a supply of telecommunications services (§ 107);

vii) When a phone card is issued its place of supply is governed by article 9 (2)(e) (§ 107);

viii) The court has an obligation, so far as possible, to interpret domestic legislation so as to avoid infringing the principle of non-taxation (§ 112).

21. Applying those principles Arden LJ interpreted paragraph 3 (3) of Schedule 10A as removing the disregard in paragraph 3 (2) where the disregard would result in the non-taxation of a taxable supply of goods or services in the United Kingdom. It was not necessary to formulate precisely the words which would have that effect.
22. In the present case it is plain that Mr Arachchige is not registered for VAT in any other member state. If, therefore, he is not liable to pay VAT on retailer vouchers that he has sold, then no VAT will be payable on those vouchers. That would mean that the principle of avoidance of non-taxation would be infringed. I ought to interpret the place of supply rules to avoid that result if it is possible to do so.
23. The primary place of supply rule in force at the relevant time was contained in section 7 (10) of VATA. Under that provision it is clear that Mr Arachchige "belonged" in the United Kingdom, and that therefore any supply by him took place in the United Kingdom. On the face of it, therefore, he would be liable to pay VAT on his supplies. However, section 7 can be amended by Treasury order. Article 21 (1) of the Place of Supply Order provided:

"The place of supply of a right to services shall be the same as the place of supply of the services to which the right relates (whether or not the right is exercised)."

24. As I see it, what this is saying is that A is the same as B, where A is the place of supply of a right to services and B is the place of supply of those services. If A = B, then one can identify A, in which case identification of A will automatically identify B. Or one can identify B, in which case identification of B will automatically identify A.
25. The Tribunal first applied the place of supply rules to determine the place of supply of the telecoms services. They thus first embarked on the identification of B. They held that where the telecoms services were supplied by a service provider who "belonged" outside the United Kingdom the services were supplied where the service provider "belonged". However, where the service provider "belonged" outside the EU altogether then article 18 of the Place of Supply Order meant that the supply took place within the United Kingdom because that was where the effective use and enjoyment of the service took place. Having identified the place where the telecoms services were supplied (B) in this way, they then held that the place of supply of the phone card (A) was the same place. They expressed their conclusion as follows (§ 85):

"Therefore the position appears to be the following:

(i) if the supplier of the telecoms service belongs in the UK, the supply of the card is made in the UK (section 7(10) and no application of Article 17);

(ii) if the supplier of the telecoms service belongs in the EU but not in the UK, the supply of the phone card takes place within the EU and not in the UK (section 7(10) and no contrary provision in SI 1992/3121);

(iii) if the supplier of the telecoms service belongs outside the EU, the supply of the phone card takes place in the UK (section 7(10) overridden by article 18)."

26. But in so far as this conclusion deals with cards redeemable with service providers who "belong" in other member states, it infringes the principle of avoidance of non-taxation. Returning to my algebraic paraphrase of article 21 the Tribunal identified B and then equated it with A. As a matter of the language of article 21 (1) of the Place of Supply Order it would have been possible to identify the place of supply of the phone card (A) first and then to have equated that with the place of supply of the telecoms services (B). Since on any ordinary view of the facts the place of supply of the phone cards was the United Kingdom, that would result in the place of supply of the telecoms services also being treated for VAT as being the United Kingdom. That interpretation avoids any infringement of the principle of avoidance of non-taxation. There is an alternative route to the same conclusion. As noted, Arden LJ categorised the supply of a phone card as being itself a supply of a telecommunications service for the purposes of VAT. On that basis the place where the telecommunications services were supplied was West Hendon Broadway. Thus as a matter of fact the place of supply of the right to the services was the same as the place of the supply of the services themselves, so that, on the facts, A = B. Both A and B are the United Kingdom.
27. HMRC also point to a number of serious consequences if the Tribunal's decision was correct:

i) As found by the Tribunal some of the phone cards that Mr Arachchige bought and sold were phone cards issued by IDT. In accordance with the ruling of the Court of Appeal those cards would be taxed at the distribution stage. However, when they reached the retail stage of the chain of distribution they would fall outside VAT. The net result of this would be that VAT would be lost. The distributors would have recovered input tax on their purchase of the phone cards as would Mr Arachchige himself. Unless he was liable to account for output tax on his own sales, no VAT would ultimately be paid. That would flatly contradict the ruling in IDT.

ii) In IDT Arden LJ said in terms that if the cards under consideration had been retailer cards there would be no question but that supplies of them after the initial issue would have attracted VAT in the United Kingdom. But the Tribunal's decision means that many of them will not.

iii) One possible consequence of the Tribunal's decision would be that Mr Arachchige would be required to register for VAT in every member state in which the redeemers of phone cards provided telecommunication services because he would be treated as having made supplies in each of those member states. That can hardly be supposed to have been Parliament's intention. Moreover, if the Tribunal is right a business whose turnover exceeds the registration threshold if conducted in one member state may escape from VAT completely if it is treated as a series of separate businesses (each one of which is below the relevant registration threshold) making supplies in a multiplicity of member states.

iv) If article 21 has the consequence that the Tribunal ascribed to it in this case, then it ought to have been determinative in IDT too. That necessarily entails that IDT was wrongly decided. But it bound the Tribunal (and it binds me too).

28. Mr Southern, appearing for Mr Arachchige, raised a number of objections to HMRC's position. First, he relied on the explanatory note to the Value Added Tax (Place of Supply of Services) Amendment Order 1997 which first inserted article 21. That reads:

"The effect of art 21 is that the supply of a right to services will be treated as if it were supplied in the same place as the underlying supply to which the right relates, whether or not the right is exercised."

29. I agree that the explanatory note envisages that the exercise to be performed is that which the Tribunal undertook (i.e. first identify the place where the services are supplied and then equate to that place the place where the right to those services is supplied). However, article 21 was introduced before the remodelling of the provisions relating to vouchers in the light of the Argos case. The interpretative obligation applied by the Court of Appeal in IDT is applicable where Parliament had not foreseen the particular problem (as was the case in IDT itself). In my judgment that is the position here. Moreover, the obligation to interpret domestic legislation so as to conform with a directive is a strong obligation which may even permit the court to write in words that are not there. In my judgment that obligation undoubtedly permits the court to give effect to a less obvious meaning of the actual language used, without writing in any words, where it is necessary to avoid infringement of a community law principle underlying a directive. Second, Mr Southern said that there was no basis for HMRC's contention in European law. However, in IDT the Court of Appeal held in terms that the principle of avoidance of non-taxation was a principle of EU law. It is that principle which is in play here. Third, he said that HMRC's position might result in an unseemly conflict between member states fighting over each other's tax revenues. That is why he said article 9 (3) of the Sixth Directive did not allow the deemed switching of the place of supply from one member state to another. In my judgment that objection is met by the answer that HMRC's construction will be applied only where it is necessary to prevent infringement of the principle of avoidance of non-taxation. The correlative principle is the avoidance of double taxation, and national taxing authorities can be expected to perform their legal duty to abide by that principle too. Fourth, Mr Southern said that the Tribunal's decision was not inconsistent with IDT because in IDT the court had held in terms that article 9 (3) of the Sixth Directive did not apply, whereas it did apply in the present case. However, in my judgment IDT was applying a much broader principle, which is equally applicable in the present case. Fifth, Mr Southern said that a directive addressed to member states should not be interpreted as imposing direct obligations on a citizen, although a directive could be relied on by a citizen as conferring rights upon him: Marshall v Southampton and South West Hampshire Area Health Authority [1986] 1 QB 401. But in my judgment that principle is not in play. It applies where a member state was required by a directive to transpose the directive into domestic law and has failed to do so. That is not this case. The United Kingdom has transposed the Sixth Directive into domestic law. The question is one of interpretation of that domestic law. The court's obligation is to interpret domestic law in accordance with a directive (and overarching principles of EU law) even if such an interpretation may have an adverse effect on individual citizens: Hutchison 3G UK Ltd v Customs and Excise Commissioners [2008] STC 218 (per Kokott A-G at §§ 147, 148).
30. Where I think that the Tribunal went wrong was that they treated IDT as an "add on" to be considered after they had come to a conclusion about the meaning of article 21. The correct approach, in my judgment, would have been for the Tribunal to have informed itself of the principles explained in IDT before embarking on the process of construction at all. In addition, I do not agree with the Tribunal that article 21 is unambiguous, for the reasons I have tried to explain. Finally, as HMRC rightly submit, the Tribunal's ultimate conclusion is one that infringes the principle of avoidance of non-taxation, and undermines the conclusion of the Court of Appeal in IDT.
31. For the reasons that I have tried to explain, I will allow the appeal.