First-tier Tribunal (Tax)

[2010] UKFTT 264 (TC)

TC00558

 Appeal numbers:  LON/00/0653

                                                                                             LON/01/0762

                                                                                             LON/01/0805

                                                                                             LON/00/1333

PROCEDURE – Further hearing – Further hearing required to determine matters in light of ruling of ECJ – Categories of evidence required at further hearing

FIRST-TIER TRIBUNAL

                        TAX

                             (1) ISLE OF WIGHT COUNCIL

                          (2) WEST BERKSHIRE COUNCIL

  (3) MID-SUFFOLK DISTRICT COUNCIL

(4) SOUTH TYNESIDE METROPOLITAN BOROUGH COUNCIL                                                      Appellants

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                             REVENUE AND CUSTOMS (VAT)         Respondents

                                                TRIBUNAL:  SIR STEPHEN OLIVER QC

                                                                         NICHOLAS PAINES QC

Sitting in public in London on 19 May 2010

Julian Ghosh QC and James Henderson, counsel, instructed by Rowel Genn Ltd, solicitors, for the Appellants

Christopher Vajda QC and Paul Harris, counsel, instructed by the General Counsel and Solicitor to the Commissioners of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.         The issue in these proceedings is whether the Appellant Local Authorities were wrong to account to the Commissioners of Customs and Excise (now HMRC) for value added tax on their charges for parking in Local Authority-operated off-street car parks and can rely on article 4(5) of the Sixth VAT Directive (now article 13 of Directive 2006/112) in order to reclaim VAT previously paid and avoid liability for VAT in the future.  The litigation has a long procedural history, dating back to the year 2000 and involving a number of decisions of the Tribunal, the High Court and, on reference to it by the High Court of questions of EU law, of the European Court (ECJ).  The remaining issue is whether (as HMRC maintain) the Local Authorities are to be ‘regarded as taxable persons’ when they make supplies of off-street parking in accordance with the second unnumbered subparagraph of article 4(5).

2.         In a Decision released in 2006 the VAT and Duties Tribunal (Sir Stephen Oliver and Kenneth Goddard MBE) allowed the Local Authorities’ appeal against HMRC’s refusal to refund the VAT previously accounted for by the Local Authorities.  HMRC appealed to the High Court (Rimer J as he then was), which referred questions of interpretation of article 4(5) to the ECJ.  It is common ground that the Tribunal must now consider the case afresh in the light of the ECJ’s judgment.  The parties differ, however, on the question of what the judgment means.  After the ECJ gave judgment, the case came back before the High Court in March 2009.  On that occasion Rimer LJ rejected a submission by HMRC that he should dismiss the Local Authorities’ appeals in the light of the ECJ judgment; instead he remitted the appeals to the Tribunal for re-hearing.  In order to deal with one of the issues that the Tribunal needs to resolve at this stage, it will be necessary to consider the terms both of the ECJ’s judgment and of that of Rimer LJ.

3.         The Tribunal directed that there should be a Directions Hearing with a view to progressing the appeals towards re-hearing.  The parties are in dispute about what categories of evidence are admissible at the re-hearing.  This is our decision in relation to that matter.

The Evidence

4.         All parties sought the Tribunal’s decision on the question of what evidence was relevant to the issue remaining to the dealt with at the re-hearing.  That issue is this. It is common ground that, but for the second unnumbered subparagraph of article 4(5), the Appellants would not be treated as taxable persons when they supply off-street parking; that is because of the opening subparagraph of article 4(5).  But the second subparagraph (hereafter, for convenience, ‘article 4.5(2)’) qualifies the opening subparagraph by providing that public bodies falling within article 4(5) “shall be regarded as taxable persons … where their treatment as non-taxable persons would lead to significant distortions of competition”.  HMRC say that non-taxable treatment here would lead to significant distortions of competition; the Local Authorities say that it would not.  In support of their case, HMRC maintain that it follows from the ECJ judgment that significant distortion of competition exists, without more, if there is more than negligible competition between Local Authority and commercial car parks.  The Local Authorities accept that there is more than negligible competition between Local Authority and commercial car parts, but wish to argue that, for a number of reasons, non-taxation of their own car parking charges could not or would not distort that competition.  On HMRC’s view of the law, what was referred to as ‘causation’ evidence – about whether non-taxation would cause a distortion or not – is legally irrelevant and HMRC seek a direction that the Local Authorities should not be permitted to adduce it.

5.         HMRC maintain that the only relevant evidence for the purposes of the enquiry mandated by the ECJ judgment is in the following categories: (a) evidence of the scale of provision of off-street parking nationwide, (b) evidence of the degree to which off-street parking is provided by Local Authorities and (c) evidence “at a high level of abstraction – and expressly not at the level of each individual, local economic market” that the provision by private operators is in actual or potential competition with the Local Authority provision.  The Appellants wish in addition to adduce evidence in further categories, which we summarise as being (a) evidence that motorists are not price-sensitive to parking charges, either at all or at least not to the extent of being influenced by a price differential of 7/47ths, so that competition would not be distorted even if Local Authorities passed on the VAT saving resulting from non-taxation, and (b) evidence that the legal framework within which Local Authorities operate, both as regards ‘hard law’ in the shape of local government legislation and ‘soft law’ in the shape of policy documents emanating from sources such as central government, has the effect that they would not or could not alter their pricing or other market behaviour as a result of non-taxation.

6.         For HMRC, Christopher Vajda QC and Paul Harris submitted that it was clear from various passages of the ECJ judgment that, once it was established that there was more than negligible competition between public and private providers of a given service, non-taxation of the public body was conclusively presumed to distort it.  Mr Vajda referred to the ECJ’s frequent repetition in its judgment that article 4(5)(1) is an exception to the general rule in VAT that economic activities are taxable, requiring to be construed strictly, while by contrast article 4(5)(2) restores the general rule and is not to be construed narrowly.  Within the part of the judgment dealing with the High Court’s first question – whether distortion of competition has to be established separately for each Local Authority or, instead, nationally – Mr Vajda placed particular reliance on paragraphs 33-40 and 49; there the Court referred to the problem of a public body providing goods or services in parallel with private providers “with the result that the treatment of that body as a non-taxable person may [our emphasis] give rise to certain distortions of competition”.  The Court went on to refer to two provisions designed to deal with that problem; the third subparagraph of article 4(5), by which public bodies providing the goods or services listed in Annex D to the Directive (except on a negligible scale) are ‘in any event’ taxable, non-taxation being in the Court’s words “presumed to lead to distortions of competition”, and article 4(5)(2) which dealt with other activities carried on in parallel by providing for public bodies to be taxable “where their treatment as non-taxable persons would lead to significant distortions of competition”.  Mr Vajda relied on the Court’s description of the two subparagraphs as having ‘the same logic’, the holding that taxable treatment “results from the carrying-on, as such of a given activity, irrespective of whether or not those bodies face competition at the level of the local market in which they engage in that activity” and the Court’s eschewing, in the interests of legal certainty, “often complex economic analyses of the conditions of competition on a multitude of local markets”.

7.         The High Court’s second question had been what was meant in article 4(5)(2) by the expression “would lead to” [significant distortion of competition].  Frustratingly for present purposes, the ECJ reinterpreted the question as asking only whether the concept of distortion in article 4(5)(2) extended to potential competition.  Mr Vajda drew our attention to the Court’s conclusion, on the grounds that article 4(5)(2) is not to be narrowly interpreted, that discouragement of potential competition is included, provided that the possibility of private entry is real and not purely hypothetical.  In that context he emphasised the Court’s statement that non-taxation of public bodies is “liable, by itself” to discourage private entry.  He accepted that paragraph 64 of the judgment dictated a factual enquiry into whether the possibility of a private operator entering the market was real, but argued that that was the only factual enquiry to be done.  In relation to the third question – the meaning of “significant” – the Court repeated that the exception in article 4(5) to the general rule of taxation is to be construed strictly and permits non-taxation “only in cases where it would lead only to negligible distortions of competition”.  In summary, Mr Vajda submitted, given that taxation and non-taxation of different categories of suppliers was susceptible of distorting competition, article 4(5)(2) applied wherever there was more than negligible competition; it followed ‘the same logic’ as article 4(5)(3), by which, in the interests of fiscal neutrality, mere provision of a supply listed in Annex D was taxable without any enquiry as to whether competition was in fact distorted.  He criticised Mr Ghosh’s suggested additional categories of evidence as necessary being evidence about local markets, which he said the European Court had prohibited.

8.         In response, Mr Ghosh QC pointed out – accurately – that the test set by article 4(5)(2) was whether there would be distortion of competition, and nowhere in the judgment did the Court say that distortion was presumed.  He pointed out that, as was common ground, the existence of actual or potential competition was left by the judgment as a factual matter, requiring evidence.  He also placed understandable reliance on the terms of Rimer LJ’s judgment remitting the matter to us.

9.         As already mentioned, Mr Vajda had submitted to Rimer LJ that the Local Authorities’ appeals should be dismissed on the basis of the ECJ’s judgment.  He relied on the Tribunal’s previous finding that 70% of off-street parking was provided by Local Authorities as establishing that they provided off-street parking on a more than negligible scale (in Rimer LJ’s words) “argued from that starting point that, because the ECJ regarded the interpretation of the scope of article 4.5(2) as covered by the same logic as that underlying article 4.5(3), it followed that there is similarly a presumption that, once the scale of activity of an article 4.5(2) activity exceeds the “negligible” threshold, a different tax treatment of that activity will give rise to distortions of competition; and his submissions included that paragraph 62 of the ECJ’s judgment supported the presumption of relevant distortion.  Thus, he said, there is no need for a remission of the appeal to the tribunal; I can decide it finally here and now”.

10.       Rimer LJ rejected that argument, and Mr Ghosh placed reliance on the terms in which he did so.  Mr Vajda explained the difference between HMRC’s position before Rimer LJ and their stance before us as being that they had been unable to rely on any finding that there was, nationally, more than negligible competition between Local Authorities and private car park providers; HMRC now accepted that that (but nothing else) had to be established by evidence.  Mr Ghosh rejected that explanation on the basis that there was no dispute that more than negligible competition existed; absence of such evidence would not have been an obstacle.  He suggested that paragraph 4 of Rimer LJ’s first judgment (making the reference) contained a finding that there was competition. It is unnecessary to decide whether that paragraph (in which Rimer LJ had referred to the existence of public and private providers and the ‘potential for competition’) goes as far as Mr Ghosh suggests; it seems to us that the terms in which Rimer LJ rejected HMRC’s submission show that the stumbling block in Rimer LJ’s eyes was not the absence of evidence of more than negligible competition, but rather HMRC’s reliance on a presumption.  He continued:

Cogently though Mr Vajda advanced the argument, Mr Ghosh QC for the local authorities satisfied me that it is unsupported by a single utterance in the ECJ’s judgment.  Not only is it so unsupported, the plain sense of the ECJ’s judgment is that there is no question of any such presumption arising even in a case in which the scale of the article 4.5(2) activity is more than negligible.

It is of course the case that the ECJ’s consideration of article 4.5(3) lent colour to its interpretation of article 4.5(2).  It is also the case that a clause 4.5(3) activity that is carried on at more than a negligible scale will be presumed to lead to distortions of competition.  The ECJ said so in terms in paragraph 35.  The assistance that the ECJ derived from article 4.5(3) was that article 4.5(2) should likewise be interpreted in a way that does as little damage as possible to the principle of fiscal neutrality.  What it nowhere said, however, was that article 4.5(2) was in some manner to be treated as subsumed into article 4.5(3) so as to produce the result that a public authority carrying on an article 4.5(2) activity will automatically be considered to be a taxable person if the scale of that activity is more than negligible.

The difference in language as between articles 4.5(2) and 4.5(3) shows why the ECJ said no such thing.  I recognise that, by itself, that difference might not have been of materiality since it may be that, had the ECJ wanted to interpret article 4.5(2) as so subsumed, it would not have allowed the difference in language to stand in its way.  But it did not do so.  Had it been disposed to do so, it would not have answered the third question.  Its answer to that question was not to the effect that the extent of the relevant inquiry is whether the scale of the 4.5(2) activity is more than negligible.  Its answer was that the inquiry is whether the treatment of the relevant public authority as a non-taxable person would lead to actual or potential distortions of competition of a more than negligible dimension.  That is an inquiry that requires a factual investigation, not the application of a presumption.  The same point was underlined by what the ECJ said in paragraphs 62 and 64.  Contrary to Mr Vajda’s submission, paragraph 62 was not saying, and does not mean, that the treatment as a non-taxable person of a public authority carrying on a car-parking activity would be presumed to discourage potential competitors from entering the market.  It was saying no more than that it may do so, with paragraph 64 underlining that this sort of question is not a matter of presumption but is a matter of fact.

11.       At the same time, at paragraph 18 Rimer LJ “confess[ed] to an unawareness of how the type of exercise expected by the ECJ might be carried out” and declined to give any guidance.   But it seems to us that the only possible interpretation of his judgment is that, while it is for the Tribunal to decide how to carry out the exercise, we are not to apply the presumption that Mr Vajda contends for.  We agree with Mr Ghosh that we are constrained by the terms of the remission to us.  We do not regard Rimer LJ’s judgment as prohibiting HMRC from relying on commonsense propositions such as that consumers do not generally wish to pay more than they need for a service, at least to the extent that quality of service is not an issue, or that if there are two categories of rival supplier and one category does not have to account for VAT on its turnover while the other does, the non-taxable supplier will be placed in the advantageous position of being able to price more cheaply than the other while retaining the same turnover and/or to price at the same level while retaining more turnover.  HMRC have paragraph 62 of the ECJ judgment as authority for the proposition that non-taxation of Local Authority car parks is liable by itself to discourage private entry into the market.  But the Appellants are plainly entitled to adduce evidence to the effect that, in the case of off-street car parking, cheaper pricing will not result from the tax advantage and/or that, if it does, will not affect demand.

12.       Even were we not constrained by Rimer LJ’s judgment, we would have difficulty finding in the ECJ judgment clear support for the proposition that non-taxation is irrebuttably presumed to distort competition.  The terms of that judgment suggest that the Court did not think any issue arose beyond that of the existence of non-negligible competition, but we suspect that that is because it was not alerted to the existence of a further issue as to whether differential taxation distorted competition in this market.  If the Court had been aware of such an issue, it would not have rephrased the second question in the way it did.

13.       It was briefly and faintly suggested that we re-refer to the ECJ the question of whether differential taxation is conclusively presumed to distort competition for the purposes of article 4.5(2).  We are not attracted by that possibility.  Apart from the additional delay that doing so would cause to these already elderly proceedings, we remind ourselves that the statutory question under article 4.5(2) is whether non-taxation would distort competition.  The ECJ could only rule on questions of law and it is not obvious why, as a matter of law, article 4.5(2) should apply even in a case where it can be established that non-taxation would not distort competition. The question whether non-taxation distorts competition in a particular case is self-evidently a question of fact and law, more suitably determined by the Tribunal.

14.       We invite the parties to agree draft direction and a timetable for proceeding towards a re-hearing of the appeal.  If agreement cannot be reached, we shall hear further argument.  To enable the Tribunal to process this appeal we have expressed these in a formal Direction.

15.       This is a full reasoned decision on the matter raised by the Respondents’ Application.

SIR STEPHEN OLIVER QC

                                         NICHOLAS PAINES QC

RELEASE DATE: 11 June 2010