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Isle of Wight Council v Customs and Excise [2004] UKVAT V18557 (06 April 2004)

TAXABLE PERSONS – Public authorities – Activities or transactions engaged in as public authorities – Public authority operating off-street car parks and letting spaces for the parking of vehicles – Whether public authority taxable person in respect of letting of parking spaces – No – EC Council Directive 77/388, art 4.5

TAXABLE PERSONS – Activities or transactions engaged in as public authorities – Exclusion from tax not available where this would lead to significant distortions of competition – Whether such provision properly transposed into national law – No – EC Council Directive 77/388 art 4.5, second indent

LONDON TRIBUNAL CENTRE

ISLE OF WIGHT COUNCIL Appellant

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

KENNETH GODDARD MBE

Sitting in public in London on 16-18 February 2004

Julie Anderson, counsel, instructed by W J B Chiltern, tax consultants, for the Appellant

Christopher Vajda QC and Paul Harris, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

Isle of Wight Council ("the Council") appeals against the Commissioners' refusal to pay a claim made under VAT Act 1994 section 80 for repayment of tax said to have been overpaid.

The appeal concerns the Council's liability to VAT on payments received in respect of its operation of off-street parking facilities. The appeal raises four issues:

• the first ("the special legal regime issue") is whether, as the Council contends, its provision of off-street parking facilities is excluded from charge to VAT by the operation of article 4.5 of the EC Sixth Directive as being "activities or transactions in which they engage as public authorities";

• the second ("the implementation issue") is whether the second paragraph of article 4.5 (which treats as taxable persons local authorities that engage in such activities "where treatment as non-taxable would lead to significant distortions of competition") has been properly implemented into UK law;

• the third ("the competition issue") is whether, as the Commissioners contend and assuming that the second paragraph of article 4.5 has been properly implemented, treatment of the Council as a non-taxable person would lead to significant distortions of competition and

• the fourth ("the overpayment issue") is whether VAT is chargeable on amounts which exceed the published tariff in circumstances where the parking machine cannot give change.

This preliminary hearing is concerned with issues 1 and 2 only, i.e. the special legal regime issue and the implementation issue.

The special legal regime issue : the legal framework

Both sides focussed on the application of article 4.5 to the exclusion of any domestic provisions. We will follow that approach. This appeal, as already noted, relates to the off-street car parking activities of the Council. So far as is relevant to the issue article 4.5 provides –

"5. States, regional and local government authorities, and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions.

However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition."

Article 4.5 has been the subject-matter of three references to the European Court of Justice that are directly relevant to the present issue. These are Carpaneto No.1 [1989] ECR 3233 and [1991] STC 205, Commission v United Kingdom (Case C-359/97) [2000] STC 777 and Fazenda Publica v Camara Municipal do Porto (Case C-446/98) [2001] STC 560. The issue in third of these, the Porto case, which is the only decision we need refer to at this stage, was whether the letting of spaces for the parking of vehicles by Porto came within the first paragraph of article 4.5. The spaces in question were either on the public highway or in car parks established on the city's public property, its private property, or land belonging to private individuals. The Court summarized the question in paragraph 14 as follows:

"By its first question, the national court essentially asks whether the letting of spaces for the parking of vehicles is an activity which, when carried out by a body governed by public law, may be regarded as being engaged in by that body as a public authority, within the meaning of the first sub-paragraph of article 4.5 of the Sixth Directive."

The Court then (in paragraph 17) stated as settled law, based on, inter alia, Carpaneto (No. 1) and Commission v UK –

"… that activities pursued as public authorities within the meaning of the first sub-paragraph of article 4.5 of the Sixth Directive are those engaged in by bodies governed by public law under the special legal regime applicable to them and do not include activities pursued by them under the same legal conditions as those that apply to private economic operators …"

The remaining part of the Court's judgment on this issue reads as follows:

"In the main proceedings, the activity engaged in by Porto, which is a body governed by public law within the meaning of article 4.5 of the Sixth Directive, consists in making available to motorists in return for financial consideration spaces for parking their vehicles …

In determining whether such an activity is engaged in by Porto as a public authority, it must be noted, first, that this cannot depend on the subject-matter or purpose of the activity (see Carpaneto at 235).

Similarly, whether or not Porto owns the land on which the activity in issue in the main proceedings is carried on, or whether that land is part of its public or private property, is not in itself determinative of whether it is carrying on that activity as a private authority.

The national court must, in accordance with the case law referred to in paragraph 16 and 17 above, analyze all the conditions laid down by national law for the pursuit of the activity at issue in the main proceedings, to determine whether that activity has been engaged in under a special legal regime applicable to bodies governed by public law or under the same legal conditions as those that apply to private economic operators.

The fact that the pursuit of an activity such as that in issue in the main proceedings involves the use of public powers, such as authorizing or restricting parking on a public highway or penalizing by a fine the exceeding of the authorized parking time, shows that this activity is subject to a public law regime.

In view of the nature of the analysis to be carried out, however, as the Court has already held, it is for the national court to classify the activities in issue in the light of the criteria adopted by the court … .

The answer to the first question must therefore be that the letting of spaces for the parking of vehicles is an activity which, where it is carried on by a body governed by public law, is carried on by that body as a public authority within the meaning of the first sub-paragraph of article 4.5 … if it is carried on under a special legal regime applicable to bodies governed by public law. That is the case where the pursuit of the activity involves the use of public powers."

The Advocate General (Alber), in a passage that was by implication approved by the Court, addressed the issue of whether Porto as a body governed by public law had engaged in its car parking activities under the special legal regime applicable to it. He observed:

"41. What matters is the legal way in which the activity is carried out, although the attendant factual circumstances may be taken into consideration as an indication as to the classification of the underlying legal relationship.

Thus, as an additional indication, it may be relevant whether the parking regulations are intended to manage the space available for parking and aid traffic flows or merely to cover parking, whether a distinction is drawn between car parks in terms of restricted short-way car parks and unrestricted long-stay car parks or whether long-term car parks are involved, or whether charges are made for them by parking meter, parking ticket or long-term parking permit. Furthermore, it may be significant whether or not the places are guarded and whether exceeding the parking time is punishable by a fine or provision is made merely for an additional payment or a contractual penalty (under civil law)."

Statutory provisions relating to off-street parking

Road Traffic Regulations Act 1984 is the primary legislation that, in Part IV, provides for off-street parking. Section 32 empowers local authorities to provide off-street parking places (and to authorize parking on roads) when it appears to them necessary to do so "for the purposes of relieving or preventing congestion of traffic".

Section 35 enables the local authority for those purposes to make orders covering the use of the parking place and in particular the vehicles or class of vehicles that may use the spaces, the conditions on which the spaces may be used, the charges for use of the spaces, the forms of apparatus for collecting charges and the removal of vehicles left in spaces in contravention of the regulations.

Paragraph 35A provides that "a person is guilty of an offence" for contravention or non-compliance with such an order.

Section 35B requires the local authority in question to display information as to the regulations applying to the use of its off-street parking places. Subsection (1)(d) renders unenforceable any provision (e.g. one relating to charging) where the local authority has failed to comply with the notice requirements.

Section 36 contains provisions authorizing local authorities to use roads for parking. Section 37 extends the powers for purposes of general schemes of parking control. Section 40 gives the local authorities powers of compulsory purchase of land for the purposes of providing car parking pursuant to the Act.

Section 44, which has no relevance to the Council's particular operations, provides for a power of regulation by local authorities of public off-street parking for the purposes of regulating the traffic in urban areas. A local authority may designate a "controlled area" within which the provision of parking will be regulated by local authority and licences issued.

The Local Authorities Traffic Orders (Procedure) (England and Wales) Regulations 1996 lay down detailed procedures that the local authorities are obliged to follow when making or varying an order under the 1984 Act. These include a requirement to consult bodies such as operators of local bus services, operators of local ambulance services, fire brigades and freight transport associations where appropriate and to obtain the consent of the Secretary of State. Further, there is a statutory procedure that must be followed to enact the order requiring its publication in specific ways.

The facts

The Council is a unitary local authority created on 1 April 1995 by the Isle of Wight (Structural Change) Order 1994 made under the Local Government Act 1992. The Isle of Wight carries out its off-street car parking activities in pursuance of and under powers given to it by the 1984 Act and the Order referred to above.

There are 19 Council car parks offering some 1,500 places; 4 of these parks are free. There are 90 private car parks on the Isle of Wight offering some 2,400 parking spaces. 9 of these are in Newport and 16 of them are attached to stores or supermarkets and are free.

We will deal specifically with the circumstances of the grant of tanning permission to an applicant (W Hurst & Sons (IW) Ltd) to have a car park in Newport (the Hurst car park). Before doing so we summarize some features at the manner in which the Council conducts its car parking activities.

Traffic management is of central importance on account of the seasonal variations in population and vehicles; Cowes week, for example, requires special attention to public safety and traffic control. The car parking needs of peak periods providing access for tourists who will be unfamiliar with the Island's car parks have to be balanced with facilities that can be sustained over the longer term. Car parks situated by the ferries have to be managed so as not to be blocked up by commuters to the main land. Difficulties in providing public transport throughout the Island aggravate the use of cars by local people. These items call for restrictions on the periods for which cars may be parked and the setting of fees so as to ration the parking in different locations between users and to manage traffic flows. For example, town centre car parks are the most expensive and are short-stay only.

The Council's car parking strategy has to maintain a balance between the needs for car parks, for other public services and for pedestrianized access to shops and leisure facilities. It has to balance the requirements of permanent residents with those of visitors.

The Council's own car parks collect fees through machines (which do not give change). The machines and the information printed on the tickets are prescribed by Order; otherwise, as already noted, charges would be unenforceable. The information on the ticket is relevant to offences involving infringements and their prosecution. The revenues go into the Council's general budget.

When making an order under the 1984 Act in relation to the provision and operation of off-street car parking, the Council, in common with other local authorities, is required to advertize it as a traffic regulation order in pursuance of the Local Authorities Traffic Order (Procedure) (England and Wales) Regulations 1996, having carried out the requisite consultation exercise.

18 orders under the 1984 Act were made in the period relevant to the present appeal.

The Council has a team of staff responsible for traffic management. These work alongside the staff responsible for engineering control and between them consider all the highway implications when imposing conditions governing permissions for off-street parking and when advising on the changes to any order.

Council car park facilities were, said Mr Peter Taylor (a Council officer who gave evidence), provided as a service. The Council does not seek to maximize these facilities as a revenue earning resource. It sets the tariffs to maximize use while balancing parking spaces with demand. With some of the car parks it aims, through the use of its charging policy, to give priority to shoppers rather than to local workers. On occasions, such as the run up to Christmas, the Council waives fees completely in order to encourage people to come and shop.

The Hurst car park example

The application for planning permission for change of use of a yard from industrial etc to form a privately run off-street car park in Newport was granted by the Council on condition that it should function as a short-stay park (with three identified designated long-stay places probably for staff use). That condition was imposed in line with a guideline policy "to reduce car parking requirements to an operational minimum" in order, inter alia, to "encourage travel by means other than car".

The other relevant condition for the grant of planning permission was that the charges should be in line with the Council's published charging policy and that no changes should be made without the Council's consent. This latter condition was imposed "in compliance with Town Centre Management Strategies which give priority to short-term visitor parking in accordance with Policy TR16 and parking guidance Policy Appendix G of the Isle of Wight Unitary Development Plan".

The Council's published charging policy is contained in the Isle of Wight (Parking Places) Order No.1 2002. A schedule to this publishes the different tariffs for all the different Council car parks on the island. Peter Taylor said in evidence that, so far as he could see, the provisions of Policy Appendix G could have had nothing to do with the Hurst car park. He did explain however that the Council had wanted, by imposing the charging condition, to match their own car parking arrangements by not for example charging the disabled.

In common with other private car parks, Hurst is not required to use any prescribed form of ticket machine or ticket. Nor is any formal order required enabling it to alter its parking charges; permission is given by exchange of letters. If the Council were to waive or drop its own fees for its own car parks, Hurst would not be required to follow suit.

In common with other private car parks in the United Kingdom, Hurst will be within charge to VAT on its supplies of car parking services.

Conclusions from the facts

The Council's operation of its own car parks is conducted as part of its local authority administration and management functions. Car park management is integrated into its traffic control strategy in the manner summarized above. Its activities are carried out in exercise of the powers given by the 1984 Act and the Orders made under that Act. In the respects specifically identified above, the 1984 Act and the Orders prescribe the actual manner in which the Council is to conduct its car parking activities. The Council's exercise of its powers to grant permission to private operators to run car parks is, as a matter of policy, designed to keep these within its traffic flow strategy. Subject to the particular conditions imposed when planning permission is granted, the private car park operators are free to pursue their business as the general law allows.

The contentions relating to the special legal regime issue

The Council contends that there is a special legal regime that relates to the activities in issue; that, they say, is evident from the statutory provisions governing its car parking activities. That special legal regime is significantly different from the regime applicable to the private operator, such as Hurst, the only "special" circumstances of which derive from the conditions imposed on the grant of planning permission. On that basis, it was argued, the Council carried on its off-street car parking activities as a public authority in the sense that it carried them on "under a special legal regime applicable to bodies governed by public law" and its pursuit of those activities involved the use of public powers: see paragraph 24 of the judgment in the Porto reference.

The Commissioners argue that the substance of the legal regime applicable to the Council-run car parks and to those run privately is materially the same. This follows, they say, from the fact that the conditions for the private car park operator are set by the Council under the same local government policies as applied to their own car parking scheme. Specifically, the evidence shows that Hurst, taken for comparison as a private operator, is required to comply with the Council's short-stay parking policy, to operate within the Council's guidelines designed to follow that policy and to keep parking in Newport to a minimum and to keep its charges within the Council's public framework for charges.

Conclusions on the special legal regime issue

It is not in dispute that the Council is a body governed by public law. The question for us is whether the car parking activities are conducted by the Council as a public authority. To resolve that we have to determine whether it engages in the car parking activities under the special legal regime applicable to it as a body governed by public law and using the "public powers" conferred on it by that regime: see paragraphs 17 and 24 of the Porto judgment (in paragraph 4 above). If, on analysis, it appears that the Council's car parking activities are pursued by it "under the same legal conditions" as those applicable to private operators, such as Hurst, then it will follow that there is no relevant special regime applicable to the Council and it will not be conducting its car parking activities as a public authority.

We, as the national court, are required to "analyze all the conditions laid down by the national law for the pursuit of" the off-street car parking activity: see paragraph 21 of the Porto judgment. The activity conducted by the Council is not simply that of permitting people to park their cars in return for fees. The Council as a local authority has, in the course of its public administration functions, assumed the powers given to it as a local authority by the 1984 Act and the Orders created under that Act. Those powers are conferred on local authorities. Those powers and in particular the powers to provide off-street parking places are granted by section 32 of the Act "for the purposes of relieving or preventing the congestion of traffic". Those powers are not conferred on and are not directly available to private car park operators. Nor are there any statutory provisions that require such operators to relieve or prevent congestion of traffic.

The facts summarized above show that the Council has used its statutory powers relating to off-street car parks to advance its traffic management strategy. By contrast, the private operator such as Hurst exploits its car park for its own private purposes, such as personal profit. It has to comply with the conditions of the planning permission, but not otherwise. In this respect its right to charge fees may be constrained by the Council's own charging framework; that constraint is imposed by the grant of planning permission and not by the special regime applicable to the Council. In fact the evidence shows that Hurst is not required to match the Council's public charging tariffs; the planning permission simply requires it to use that tariff as a framework.

Turning on to the specific rules in section 35, these are peculiar to councils and not to private car park operators. The 1984 Act and the Orders cover, for example, the types of vehicles that may use the particular council's car park and the arrangements for removal of vehicles that have infringed regulations. Section 35A imposes a special regime for penalizing infringements of the local authority car parking regulations. Section 35B enables the Secretary of State to make regulations that are peculiar to local authorities. These further demonstrate the existence of a special legal regime applicable to the Council which is not applicable to the private car park operator.

The factors summarized above satisfy us that the Council operates its off-streets car parking activities within a special legal regime. The regime is special to it as a local authority. Moreover the pursuit of that activity involves the use of the "public powers" given to the Council by the 1984 Act and the Orders. We therefore conclude that the Council's off-street car parking activities are within article 4.5 and in principle therefore excluded from charge to VAT.

The implementation issue

The Council contend that the second sub-paragraph of article 4.5 has not been incorporated into the domestic legislation of the United Kingdom. Thus, they say, the Commissioners cannot rely on it as bringing the Council back into charge as a taxable person in respect of its off-street car parking activities. They refer to the tribunal decision in City of London Corporation (2002) VAT Dec 17892 which decides that sub-paragraph 2 has not been implemented.

The Commissioners argue that there has been implementation. Their argument runs as follows. They say that article 4, as a whole and including the second sub-paragraph of article 4.5, has been implemented into UK law. Section 4(1) of the VAT Act 1994 provides that VAT shall be charged on a "taxable supply made by a taxable person in the course or furtherance of a business carried on by him". A person is a taxable person under the VAT Act if he is, or is required to be, registered: see section 3(1). Section 42 of the VAT Act provides that a local authority which makes taxable supplies is liable to be registered. Thus the VAT Act makes local authorities liable to VAT on supplies made by them in the course or furtherance of any business carried on by them. The VAT Act is to be construed consistently with the Sixth Directive so that in the case of local authorities that make supplies under a special legal regime (i.e. satisfying the first sub-paragraph of article 4.5), they are to be taxed only where treatment as non-taxable persons would lead to significant distortions of competition. Such treatment, it is argued, is mandatory under article 4.5. Moreover, it is argued, that interpretation is one that the concept of "business" can reasonably and sensibly carry in the context of a local authority. Consequently, applying the principle in Marleasing SA (Case 106/89) [1990] ECR 1-4135, that interpretation ought to be adopted. The Commissioners rely also on Lord Slynn in British Telecommunications [1999] STC 758 where, at 762 a/b-e he observed that a literal construction of the VAT Act should be avoided when considering whether Parliament has sought to comply with its obligations under the Sixth Directive. The Commissioners go on to refer to the decision of Tuckey J (at first instance) in Institute of Chartered Accountants in England and Wales (relating to whether fees charged for regulatory licences by a professional body, constitute any economic activity). In that case [1999] STC 1155, Tuckey concluded his judgment by stating:

"I should state my tentative conclusions, which are as follows. (1) I think article 4(5) has implicitly been incorporated into the 1994 Act …".

The conclusion of Tuckey J was considered by Dr Brice at paragraph 67 of the Rhondda Cynon Taff case (relating to whether the provision and maintenance of cemeteries is an economic activity whether the second sub-paragraph of article 4.5 had been implemented in the UK). She concluded that it had, pointing out that article 4.5 should not be dissected and that reliance should not be placed on the first indent while ignoring the second. The second indent, she observed, is an extension of the first and both together provide that public bodies are not taxable persons when they are acting as such but that they are taxable persons when their activities would create significant distortions of competition.

Finally in this connection the Commissioners relied on Greater Manchester Police Authority [2000] STC 620. The argument for the Commissioners was that that case decides that article 4.5 has been put into effect by the provisions of section 33 of VAT Act which also refer to "business".

We, in common with the Council, can find no provision of the domestic legislation that incorporates the second sub-paragraph of article 4.5 and either expressly or by necessary implication excepts activities from the general rule in article 4.5 on the basis of significant distortion of competition.

The Court in paragraph 23 of the Carpaneto (No.1) decision said:

"… the Member States are required by the third paragraph of article 189 of the EEC Treaty to ensure that bodies governed by public law are treated as taxable persons where the contrary would lead to significant distortions of competition. On the other hand, they are not obliged to transpose that criterion literally into their national law or to lay down precise quantitative limits for treatment as non-taxable persons."

That paragraph indicates to us that the relevant Member State is required to incorporate the second sub-paragraph of article 4.5 by some express means. Nothing express can be found in the VAT Act.

An example of a Member State's incorporation of the second sub-paragraph is found in the Porto case which records the national (Portuguese) VAT code as providing:

"The State and other legal persons governed by public law shall not, however, be taxable persons as regards tax where they undertake operations in the exercise of their powers as authorities even if, for those operations, they receive fees or other considerations, provided this exemption does not lead to distortions of competition …

For the purposes of paragraphs 2 and 3 of this article the Minister for Financial Affairs and Plan shall define, case by case, those activities which are liable to give rise to distortions of competition and those which are exercised on a negligible scale."

There is no remotely similar provision in the UK domestic law.

Nor in our view do the decisions cited by the Commissioners in argument on this issue show that the second sub-paragraph has been implemented. The only decision of the Courts that gets near the issue is that of Tuckey J in Institute of Chartered Accountants for England and Wales. But this was obiter and in any event the possible application of the second sub-paragraph of article 4.5 to the circumstances of the Institute did not arise in that case; the case was concerned only with the operation of the first paragraph.

The decision of Dr Brice in the Rhondda Cynon Taff case deals with the point, but the relevant passage is obiter. We agree with Dr Brice that the second sub-paragraph is really one-of-a-piece with the first sub-paragraph. But that is not enough to show that the second sub-paragraph has been incorporated into domestic law. We do not read Lord Slynn's observation on page 762 of British Telecommunications as requiring us to conclude that the whole of the first and the second sub-paragraphs have been incorporated. Consequently the Council may still point to the absence of implementation of the second sub-paragraph and rely on the first sub-paragraph of article 4.5.

Section 33 of the VAT Act, as we understand it, does nothing to incorporate the second sub-paragraph of article 4.5 into the domestic legislation. Section 33 is not concerned with value added tax, either output or input tax; nor is it concerned to define a taxable person. It provides a funding mechanism for local authorities the purpose of which is to avoid distortions in public funding following the introduction of the VAT system. The Commissioners' explanation in their manual is as follows:

"The Refund Scheme was introduced to fulfil a pledge given by the Government before VAT was introduced that it would not, so far as possible, fall as a burden on the rates or rate support grant (now the Council tax and revenue support grant). Although not strictly required under EC law, the scheme is regarded by central government as an important means of financing the non-business activities of local government". (See Part 14, Chapter 3, paragraph 3.2 of the Customs and Excise Manuals.)

We can see no basis on which section 33 may be rationally explained as implementing the competition derogation in the second paragraph of article 4.5.

We turn finally to the Commissioners' suggestion that the reference to the concept of "business" can implement the derogation. Article 4.5 expressly contemplates that a public body may be undertaking activities which are also undertaken by private traders in business. The public bodies may nonetheless have the right to be treated as non-taxable bodies. The criterion of a "significant" distortion of competition is not expressed by reference to "business". We conclude therefore that, as the UK law stands, there is no provision, as there is in Portugal, which states that a public body may be treated as a non-taxable person except where it is shown that such treatment would cause a significant distortion of competition.

For those reasons, we uphold the contention put forward by the Council that the second sub-paragraph of article 4.5 has not been properly implemented into UK law. It follows that the Commissioners will not be able to rely on it in seeking to treat the Council as a taxable person in respect of its off-street car parking activities.

We direct that the Commissioners shall pay to the Council an amount in respect of their costs. If that amount cannot be agreed, the matter should be referred back to this Tribunal for further directions.

As the present hearing was a preliminary hearing and does not conclude the matter we direct that the matter should come back to us for further directions within 60 days of the release of this decision.

STEPHEN OLIVER QC

CHAIRMAN

RELEASED:

LON/00/653