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Barclays Bank Plc v Her Majesty's Revenue and Customs [2005] UKVAT V19302 (24 October 2005)

19302

VALUE ADDED TAX – preliminary issue – input tax - supplies of credit made by the Appellant to customers who exported goods outside the member states – whether there was a difference in meaning between the words "goods to be exported" which appeared in the Sixth Directive and the words "the export of goods" which appeared in national legislation – no – if there were a difference whether it was possible to interpret national law in a manner consistent with the Directive – yes - appeal on this issue dismissed – VATA 1994 S 26(1)(c) - Value Added Tax (Input Tax) (Specified Supplies) Order 1992 SI 1992 No. 3123 Art 3(b) (before 1 January 2000) and the Value Added Tax (Input Tax) (Specified Supplies) Order 1999 SI 1999 No. 3121 Art. 3(b)(after 1 January 2000)

LONDON TRIBUNAL CENTRE

BARCLAYS BANK PLC

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS

Respondents

Tribunal: DR A N BRICE (Chairman)

MRS S EDMONDSON FCA

Sitting in public in London on 28 September 2005

Stephen Morse, Director of KPMG LLP, for the Appellant

Philippa Whipple of Counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

PRELIMINARY DECISION

The appeal

Barclays Bank Plc (the Appellant) appeals against a decision made by The Commissioners for Her Majesty's Revenue and Customs (the Respondents) on 16 June 2003. The decision was to refuse a claim of £14.1M which the Appellant said was due to it in respect of input tax which it had under-recovered.

The Appellant made the claim, by way of voluntary disclosure, on 30 April 2003 and the claim related to the four calendar years 1999, 2000, 2001 and 2002. The basis of the claim was that the Appellant granted credit to customers who exported goods to places outside the member states. Some of the credit was used by the customers to support the infrastructure of their businesses (for example, the purchase of vehicles, computers and premises). The Appellant claimed that these supplies of credit were directly linked to "the export of goods", which was the phrase used in the national legislation, and accordingly that the Appellant was entitled to a deduction or refund of input tax.

The Respondents refused the claim because they were of the view that the right of deduction or refund of input tax was restricted to exempt transactions directly linked with "goods to be exported" which were the words used in Article 17.3 of the EC Sixth Council Directive (77/388/EEC) (the Directive). They agreed that supplies of credit by the Appellant to customers who exported goods, and who used the credit to finance the goods, were exempt supplies with a right to deduction or refund of input tax but were of the view that supplies of credit by the Appellant to customers who exported goods, and who used the credit to finance their infrastructure which was used in the export of those goods, were exempt supplies with no right of deduction or refund of input tax.

At a hearing for directions held on 12 November 2004 the Tribunal directed the hearing of a preliminary issue and this Decision is a decision on that preliminary issue only.

The legislation

Article 17 of the Directive contains the provisions giving the right to deduct input tax. Article 17.1 provides that the right to deduct arises at the time when the deductible tax becomes chargeable. Article 17.2 provides that a taxable person is entitled to deduct, from the tax he is liable to pay, tax due or paid in the territory of the country in respect of goods or services supplied to him by another taxable person in so far as the goods or services are used for his taxable transactions. Article 17.3 provides:

"17.3 Member States shall also grant every taxable person the right to the deduction or refund of the value added tax referred to in paragraph 2 in so far as the goods or services are used for the purposes of: …

(c) any of the transactions exempt pursuant to Article 13(B)(a) and (d) (1) to (5) when the customer is established outside the Community or when those transactions are directly linked with goods to be exported to a country outside the Community."

The "transactions exempt pursuant to Article 13(B)(a) and (d) (1) to (5)", referred to in Article 17.3(c), include the granting of credit. Thus Article 17.3(c) gives a right of deduction or refund of input tax in respect of (exempt) transactions constituting supplies of credit when those transactions are directly linked with goods to be exported to a country outside the Community.

The national legislation

The Directive has been implemented by the Value Added Tax Act 1994 (the 1994 Act). Section 24 defines input tax as tax on the supply to a taxable person of goods or services used for the purpose of a business carried on by him. Section 25(2) provides that a taxable person is entitled at the end of each accounting period to credit for so much of his input tax as is allowable under section 26 and then to deduct that amount from any output tax that is due from him. Section 26 contains the provisions which describe the input tax allowable under section 25 and the relevant parts of section 26 provide:

"26(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period … as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business:

(a) taxable supplies;

(b) supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom;

(c) such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection."

Thus section 26(2)(c) provides that input tax for which credit may be given is that attributable to such exempt supplies as are specified by order (specified supplies).

Under the provisions of section 26(2)(c) the Treasury made the Value Added Tax (Input Tax) (Specified Supplies) Order 1992 SI 1992 No. 3123 (the 1992 Order), which applied before 1 January 2000, and the Value Added Tax (Input Tax) (Specified Supplies) Order 1999 SI 1999 No. 3121 (the 1999 Order) which applied after 1 January 2000. The disputed claim related to some periods before 1 January 2000 and some after. It was agreed that Article 3 of both Orders was in the same form and so we refer throughout this Decision only to the 1999 Order. Article 3 provided:

"3. Services- …

(b) which are directly linked to the export of goods to a place outside the member states …

provided the supply is exempt … by virtue of … any of items 1 to 6 and Item 8 of Group 5 of Schedule 9 to the Value Added tax Act 1994."

Group 5 of Schedule 9 of the 1994 Act concerns finance and Items 1 to 6 include the granting of credit.

Thus the 1994 Act together with the 1999 Order gives a right of deduction of input tax in respect of (exempt) transactions constituting supplies of credit when those transactions are directly linked to the export of goods to a place outside the member states.

The preliminary issue

Both parties agreed that the natural reading of the words of the Directive allowed the deduction or refund of input tax in respect of supplies of credit made by the Appellant where such credit was used by the Appellant's customers to finance goods for export.

The Appellant relied upon the wording of Article 3(b) of the 1999 Order which, it argued, was wider in scope than Article 17.3(c) of the Directive. The Appellant also argued that, although the general rule was that national law should be interpreted so as to be consistent with the Directive, it was not possible to apply that general rule in this appeal. The Respondents argued that Article 3(b) of the 1999 Order implemented Article 17.3(c) of the Directive and went no wider; even if there were a difference in meaning the general rule (that national law should be interpreted so as to be consistent with the Directive) applied. This was not a case where it was impossible to interpret national law in accordance with the Directive.

Thus the preliminary issue for determination was whether Article 3(b) of the 1999 Order gave the Appellant a wider entitlement to a deduction or refund of input tax than that provided by Article 17.3(c) of the Directive. As argued, this issue raised the following questions:

(1) is there any difference in meaning between the words of the Directive and the words of the national law? and

(2) if there is a difference, is this a case where it is not possible to interpret national law in accordance with the Directive?

The facts

There was an agreed statement of facts and a bundle of documents. The facts were not in dispute.

The Appellant is a leading United Kingdom clearing bank, which provides banking services to clients throughout the world. The Appellant provides a range of financial services to its accountholders and customers and did so at all material times. In particular the Appellant provides credit (including lending facilities and other financial support) to various business customers engaged in the export of goods to countries outside the member states (as well as providing credit to customers engaged only in domestic trade and trade between the member states). The forms of credit supplied by the Appellant include (but are not limited to) overdrafts, loans, revolving credit facilities, and specific credit products such as bonds and guarantees. All the lending and financial support provided by the Appellant constitutes exempt supplies within the meaning of Items 1 to 6 and Item 8 of Group 5 of Schedule 9 of the 1994 Act.

The Appellant's customers who are engaged in exporting goods outside the member states use the credit supplied by the Appellant to support their export activities in a number of ways. These include (1) the purchase of goods for export; (2) the construction and/or purchase of warehouses and other buildings to store goods intended for export; (3) the purchase or hire of vans and other means of transport to move the goods intended for export; and (4) the purchase, creation or licensing of computer equipment and/or software to manage the process of the export of goods.

The Appellant is partially exempt for value added tax purposes and, under section 26(2) of the 1994 Act, can only claim input tax attributable to its taxable supplies and to its specified supplies under Article 3(b) of the 1999 Order. At all material times a special method of partial exemption had been agreed between the parties for the purposes of calculating the Appellant's recoverable input tax. The special method provided that supplies of credit which fell within the scope of the 1999 Order were to be treated as taxable supplies. At present only specified supplies of credit which are used by customers for the purchase of goods for export are treated as taxable supplies.

It was not disputed that the 1992 Order and then the 1999 Order had been made in order to implement Article 17.3 of the Sixth Directive. Prior to 1 January 1993 the United Kingdom had zero-rated certain supplies related to exports. The decision had then been taken to provide that some such supplies were exempt but with a right of recovery of input tax, so as to accord more closely with the provisions of the Directive. This had been done by the making of the 1992 Order and the 1999 Order.

Reasons for decision

We consider separately each of the questions raised by the arguments of the parties.

(1) Is there a difference in meaning?

The first question is whether there is any difference in meaning between the words of the Directive and the words of the national law.

For the Appellant Mr Morse argued that there was a clear difference between the meaning of the words used in the Directive and the words used in national law. Article 3(b) of the 1999 Order should be given its plain and ordinary meaning and the phrase "the export of goods" meant the process, function or act of exporting goods by the Appellant's customers in their normal course of international trade in goods. He argued that Article 3(b) would permit the Appellant to deduct input tax in respect of supplies of credit to customers to acquire and support the infrastructure (including vehicles, premises and computers) utilised for the purpose of carrying out the export of goods. This would include credit granted to finance all matters necessary to the actual function of exporting goods and all processes by which goods were actually exported. This would include supplies of credit to customers who produced, manufactured, and sold goods for export but not, for example, customers who acted as freight forwarders. Accordingly, the credit supplied by the Appellant to finance the infrastructure of the customers who exported goods, which infrastructure was necessary to the export function and formed part of the process by which the export of the goods occurred, was directly linked to "the export of goods" within the meaning of Article 3(b) of the 1999 Order. It followed that the Appellant should be entitled to treat the supplies of credit for such purposes as specified supplies under Article 3(b) of the 1999 Order and so as taxable supplies for the purposes of its partial exemption calculation.

For the Respondents Ms Whipple argued that there was no difference in meaning between the provisions of Article 17.3(c) of the Directive and those of Article 3(b) of the 1999 Order; the meaning was the same.

We recall that Article 17.3(c) of the Directive gives a right of recovery of input tax for certain transactions which are directly linked "with goods to be exported". Article 3(b) gives a right of recovery of input tax for certain services which are directly linked to "the export of goods". Although a slightly different word order is used we can discern no difference in meaning between the provisions of the Directive and those of Article 3(b). In our view the meaning is the same. That means that we do not have to consider the other question raised by the parties but, in case we are wrong, and as arguments were put to us we express our views.

(2) How should national law be interpreted?

The second question raised by the arguments of the parties is, if there is a difference in meaning, is this a case where it is not possible to interpret national law in accordance with the Directive?

Mr Morse argued that the words used in Article 3(b) were clear and there was no scope for interpreting them in any other way. It would be necessary to re-draft national law to interpret it in conformity with the Directive and that was not permissible. He relied upon a number of authorities in support of his view that this was not a case where it was possible to interpret national law in accordance with the Directive. For the Respondents Ms Whipple argued that, if it were possible to discern a difference, then that should be resolved by reading Article 3(b) of the 1999 Order as far as possible in accordance with Article 17.3 of the Directive. This was not a case where it was impossible to interpret national law in accordance with the Directive. Also, she argued that, if the Appellant were right, its interpretation was extremely wide and could apply to credit given to any entity engaged in the function of exporting outside member states, for example freight forwarders or cargo companies, and also the infrastructure for which the credit could be used would not be limited in the way suggested by the Appellant.

In considering the arguments of the parties we begin by referring to the authorities cited to us to see what principles they establish.

As early as 1982, in Becker v Finanzampt Münster-Innenstadt [1982] ECR 53 the Court of Justice established two fundamental principles. First, that a member state which had not adopted implementing measures required by a directive could not rely, as against individuals, on its own failure to perform the obligations which the directive entailed (paragraph 24). And, secondly, that whenever the provisions of a directive are unconditional and sufficiently precise those provisions may be relied upon by an individual as against any national provision which is incompatible with the directive (paragraph 25). It is only the first principle which is relevant in this appeal.

Two years later, in Von Colson and Kamaan v Land Nordrhein-Westfalen [1984] ECR 1891 at paragraph 26 the Court of Justice established the principle that, in applying national law, and in particular the provisions of a national law specifically introduced in order to implement a directive, national courts are required to interpret their national law in the light of the wording and the purpose of the directive. At paragraph 28 the Court of Justice added that it is for the national court to interpret and apply legislation, adopted for the implementation of a directive, in conformity with the requirements of Community law, in so far as it was given discretion to do so under national law.

In 1986, in Marshall v Southampton and South-West Hampshire Area Health Authority [1986] ECR 723 at paragraphs 48 and 49 the Court of Justice re-stated the principle in Becker that, although a directive is binding on member states, it may not of itself impose obligations on an individual and that a provision of a directive may not be relied upon as such against such a person; it was necessary to prevent the state from taking advantage of its own failure to comply with Community law.

Thus by 1986 the Court of Justice had established the principles (1) that where the provisions of a directive are unconditional and sufficiently precise they can be relied upon by an individual (2) that a member state who has not implemented a directive cannot rely upon the directive as against an individual; (3) and that national courts are required to interpret their national law in the light of the wording and purpose of a directive. We call this latter principle the principle of consistent interpretation.

These principles were subsequently applied by the English courts. In Duke v GEC Reliance Ltd [1988] 1 AC 618 Lord Templeman said at 638F:

"Of course a British court will always be willing and anxious to conclude that the United Kingdom law is consistent with Community law. Where an Act is passed for the purposes of giving effect to an obligation imposed by a directive or other instrument a British court will seldom encounter difficulty in concluding that the language of the Act is effective for the intended purpose".

However, later, at 639H, Lord Templeman said that section 2(4) of the European Communities Act 1972 did not enable or constrain a British court to distort the meaning of a British statute in order to enforce against an individual a Community directive which had no direct effect between individuals.

In March 1989 in Litster v Forth Dry Dock & Engineering Co Ltd [1990] 1 AC 546 at 559 E Lord Oliver said:

"The approach to the construction of primary and subordinate legislation enacted to give effect to the United Kingdom's obligations under the EEC Treaty have been the subject matter of recent authority in this House … and is not in doubt. If the legislation can reasonably be construed so as to conform with those obligations … obligations which are to be ascertained not only from the wording of the relevant Directive but from the interpretation placed upon it by the European Court of Justice at Luxembourg – such a purposive construction will be applied even though, perhaps, it may involve some departure from the strict and literal application of the words which the legislature has elected to use."

Thus by 1989 the national courts had adopted the principle of consistent interpretation and also the principle that a member state who has not implemented a directive cannot rely upon the directive as against an individual.

In November 1990 the Court of Justice further developed the principle of consistent interpretation. In Marleasing SA v La Comercial Internacional de Alimentación SA [1990] ECR 4135 at paragraph 8 the Court said:

"8. The obligation to interpret a provision of national law in conformity with a directive arises whenever the provision in question is to any extent open to interpretation. In those circumstances the national court must, having regard to the usual methods of interpretation in its legal system, give precedence to the method which enables it to construe the national provision concerned in a manner consistent with the directive."

In 1993 in Webb v EMO Air Cargo (UK) Ltd [1993] 1 WLR 49 at 59F Lord Keith of Kinkel repeated the principle that it was for a United Kingdom court to construe domestic legislation in any field covered by a Community Directive so as to accord with the interpretation of the Directive as laid down by the European Court of Justice if that could be done without distorting the meaning of the domestic legislation. However, at 60E and F Lord Keith added that the domestic law must be open to an interpretation consistent with the Directive whether or not it is also open to an interpretation inconsistent with it.

The limits of the principle of consistent interpretation were identified in Gemeente Emmen v Belastingdienst Grote Indernemingen [1996] STC 496 where Advocate General Fennelly said, in paragraph 34, that the interpretative obligation could not go so far as to require a national court to do violence to, or expressly contradict, the terms of national law; the interpretation and application of national law remained the functions of the national courts.

The limits were further developed in Criminal proceedings against Luciano Arcaro [1997] ECR I-4705. At paragraph 39 of his Opinion, Advocate General Elmer stated that the general rule of interpretation should be applied "so far as possible" in order to interpret provisions of national law in accordance with Community law. However, that rule of interpretation could not be applied so as to undertake an actual re-drafting of the provisions of national law as that would be tantamount to introducing the direct effect of the provisions of a directive imposing obligations on individuals by the back door and contrary to Article 189 of the Treaty. He continued in paragraph 40:

"40. In other words, if the wording of the national rule allows of several interpretations, the national court must apply, from among the various interpretations, the one which will bring the provisions of national law into harmony with Community law. If, on the other hand the wording of the law leaves no room for interpretation because for example the law says A, the rule of interpretation cannot be used contrary to the wording of the law so as to say B, even though B (but not A) is in accordance with Community law."

This principle was adopted by Mummery LJ in Customs and Excise Commissioners v Civil Service Motoring Association [1998] STC 111 at 115h where he said:

"If the words of [the national law] are so clear and unambiguous that they are capable of only one meaning and that meaning fails to give effect to the provisions of … the Sixth Directive, it is not open to the commissioners to rely upon the provisions of the directive, since to do so would be to allow the state to rely on its own failure to fulfil its obligations under the directive."

The position where national law is wider in scope than a directive was considered in Century Life plc v Customs and Excise Commissioners [2001] STC 38 and Braymist Ltd v Wise Finance Company Limited [2002] 2 All ER 333. In Century Life at 43 Jacob J said:

"In the case of an Act regulating the position as between citizen and state, such as a taxing statute … the result of the draftsman's attempt at "rewrite" rather than "copy out" has a potential effect beyond merely causing confusion and unnecessary complication … in principle the taxpayer could have the better of either form of language. He could rely upon the exemption in the Sixth Directive (which it was conceded was of direct effect). But if, by an accident of draftsmanship, the United Kingdom legislation was unintentionally wider, the taxpayer could rely on that."

In Braymist Arden LJ said at 345b that the national law went further than the directive but that it would not be appropriate to read down the national law so that it complied with the directive and no more; the court must give effect to the wording used by Parliament.

From those authorities we derive the following principles. First, that in applying national law, and in particular the provisions of national law specifically introduced in order to implement a directive, we are required to interpret our national law in the light of the wording and the purpose of the directive (Van Colson; Duke v GEC Reliance; Litster; Marleasing; Webb v EMO Air Cargo). Next, that we should be willing and anxious to conclude that United Kingdom law is consistent with Community law, especially where the United Kingdom law was passed for the purposes of giving effect to a directive (Duke v GEC Reliance). Thirdly, that if national legislation can be reasonably construed so as to conform with the directive such a construction will be applied even if it involves a departure from the strict and literal interpretation of the words of the national legislation (Litster). Finally, that if, to any extent, it is possible to interpret national law in a manner consistent with a directive, that should be done (Marleasing; Webb v EMO Cargo; Arcaro).

Applying those principles to the facts of the present appeal we recall that Article 3(b) of the 1999 Order was specifically introduced in order to implement Article 17.3(c) of the Directive. Accordingly, even if there were a difference in meaning between Article 3(b) and Article 17.3(c), we should interpret Article 3(b) in the light of the wording and purpose of Article 17.3(c) and conclude that the meaning of both phrases was the same. We should reach the same conclusion even if that would involve a departure from the strict and literal interpretation of the words of Article 3(b) (although in our view there is no such departure). In our view it is possible to interpret Article 3(b) in a manner consistent with Article 17.3(c) and that we have done.

Accordingly, we conclude that the application of the general rule of consistent interpretation also leads to the conclusion that there is no difference in meaning in the words used in national law on the one hand and in the Directive on the other.

However, Mr Morse for the Appellant argued that this was a case where it was not possible to interpret national law in accordance with the Directive.

The authorities we have mentioned do indicate that there are limits on the application of the rule of consistent interpretation. These authorities indicate that national law does not have to be interpreted in accordance with a directive: if a court does not have discretion to do so (Von Colson); if a consistent interpretation is not possible (Webb v EMO Cargo); if a consistent interpretation would do violence to, or expressly contradict, national law (Gemmente Emmen); if a consistent interpretation required the actual re-drafting of national law because the wording of the national law was so clear and unambiguous that it left no room for interpretation (Arcaro); if to do so would be to distort the meaning of national law in order to enforce against an individual a directive which had no direct effect between individuals (Becker; Marshall; Arcaro; Civil Service Motoring Association); and if the national law was wider in scope than the directive the national law should not be read down – the citizen could rely on the wider national law (Century Life; Braymist).

Applying those principles to the facts of the present appeal we consider that we do have discretion to interpret national law consistently with the Directive. In our view, a consistent interpretation is possible and does not distort, but clarifies, the meaning of Article 3(b). A consistent interpretation does not do violence to, nor expressly contradict, Article 3(b) neither does it require the actual re-drafting of Article 3(b). In our view this is not a case where consistent interpretation would amount to the enforcement of a directive against an individual. And, finally, in our view Article 3(b) is not wider in scope than the Directive. Accordingly we conclude that this is not a case where it is impossible to adopt a consistent interpretation.

Our conclusion on the second question is that, if there were a difference in meaning, it is possible to interpret national law in accordance with the Directive which also leads us to the conclusion that the words used in Article 3(b) of the 1999 Order mean the same as those in Article 17.3(c) of the Directive.

Decision

Our conclusions on the questions raised by the arguments of the parties are:

(1) that there is no difference in meaning between the words of the Directive and the words of the national law; that means that the appeal must be dismissed but in case we are wrong, and as arguments were put to us on the second question, we express our views which are:

(2) that, if there were a difference, we must interpret national law so that it is consistent with the Directive and this is not a case where it is impossible to interpret national law in accordance with the Directive.

Thus our decision on the preliminary issue is that Article 3(b) of the 1999 Order does not give the Appellant a wider entitlement to a deduction or refund of input tax than that provided by Article 17.3.

As this is a preliminary issue, this Decision does not determine the appeal. The parties are at liberty to apply to the Tribunal within the period of two months after the date of the release of this Preliminary Decision for the further hearing of another issue or other issues. If no such application is made within two months then this Decision shall become final and the Appellant shall then pay to the Respondents its costs of this appeal.

DR A N BRICE

CHAIRMAN

RELEASE DATE: 24 OCTOBER 2005

LON/2004/0848

Authorities referred to in argument but not mentioned in this Decision

Paola Faccini Dori v Recrb Srl [1994] ECR I-3325 at paragraph 22

El Corte Inglés SA v Cristina Blázquez Rivero [1996] ECR I-1281 at paragraph 16.