B e f o r e :
LORD JUSTICE PILL
LORD JUSTICE LATHAM
LADY JUSTICE ARDEN
|| The Commissioners for Her Majesty's Revenue and Customs (formerly known as the Commissioners for Customs and Excise)
||- and -
||IDT Card Services Ireland Ltd
(Transcript of the Handed Down Judgment of
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Mr Nigel Pleming QC & Mr Paul Harris
(instructed by Solicitor's Office, VAT & Duties Tribunal Division) for the Appellant
Mr K.P.E. Lasok QC & Miss Philippa Whipple
(instructed by Messrs Deloitte & Touche LLP) for the Respondent
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Lady Justice Arden:
- This appeal raises a point of novelty and difficulty about the interpretation of domestic implementing legislation in accordance with the purposes of the Sixth EC VAT Directive (77/338/EC) ("the Sixth Directive"). It arises from the order dated 21 December 2004 of Moses J (as he then was) whereby he allowed the claim of the respondent, which I will call ICSIL, for judicial review of the decision described below dated 13 and 14 July 2004 of the appellants, whom I shall call Customs & Excise.
The nature of the issue
- The dispute between the parties arises out of the issue of phonecards and about whether value added tax ("VAT") should be charged in the United Kingdom on the supply of those cards where they are redeemed in another member state which does not adopt the same rule as the United Kingdom, namely that the supply of services on redemption and not the issue of the card should be subjected to VAT. If the redemption of the card is not subject to VAT in this situation, the supply of telecommunications service on the redemption of cards acquired in the United Kingdom is VAT-free. This situation may be uncommon. Member states of the European Union charge VAT on taxable supplies in accordance with uniform rules and this avoids the risk of double taxation or non-taxation of taxable supplies. Where, however, there is a prepayment for the service, member states can legitimately take different views as to whether to treat the issue of a voucher in exchange for a prepayment as the taxable supply, and when they do there is a potential for double taxation or non-taxation especially in the case of cross-border supplies.
- The treatment of phonecards for VAT purposes varies as between the United Kingdom and the Republic of Ireland. Under Irish law, the rule in the Sixth Directive as to the place of supply is applied to the issue of phonecards and not to the provision of services on redemption. Accordingly, the consideration paid for phonecards is treated as a prepayment for telecommunication services. When phonecards are supplied to end-users for their private use, in Ireland or another member state, or to persons in Ireland for the purposes of their business ("traders"), they attract VAT on that supply in Ireland, but no VAT is payable in Ireland when they are supplied to traders outside Ireland. Correspondingly, no VAT is payable under Irish law when phonecards are redeemed and access is obtained to telecommunications services and this is so even if the telecommunications services are supplied in Ireland and the phonecards in question were supplied to the end-user by a retailer who is a trader established outside Ireland and who in turn receives his supply of phonecards from an issuer in Ireland. There is therefore the potential for the supply of services in that situation to be free of VAT. The question at the heart of the issue of interpretation on this appeal will resolve the question whether that is the position in the United Kingdom. The treatment for VAT purposes of the issue of phonecards in the United Kingdom is different from that in Ireland. In the present case the phonecard is a 'credit voucher', because the issuer of the voucher is not the person by whom the voucher is to be redeemed, the United Kingdom does not treat the sum paid for the issue of such vouchers as a prepayment for services. The supply of a phonecard is thus subject to VAT only when the end-user gains access to the telecommunications services and, following the decision of the judge in this case, the supplier fails to pay VAT which is levied in the United Kingdom. On that basis the question posed earlier in this paragraph (viz whether VAT is payable in the circumstances in the present case) is answered in the negative. This is because on the judge's ruling the United Kingdom cannot impose VAT on the intermediate supply of phonecards in the United Kingdom by reference to the non-imposition of VAT on the supply by Interdirect of services whose place of supply is Ireland. As I have explained, as a matter of Irish law, VAT is not imposed either on the issue of phonecards to distributors outside Ireland (because they are traders) or on the supply of telecommunications services obtained by the redemption of those phonecards. The supply of services on that issue and redemption are VAT-free. Hence this appeal.
- It may seem surprising that there are different rules for the incidence of VAT in different member states given the history of the harmonisation of VAT. It would appear that when the harmonisation directives were adopted, of which the most notable is the Sixth Directive, the member states did not anticipate the problems that would arise from the issue of face value vouchers, that is vouchers issued representing a promise to provide goods or services on redemption to the value of the nominal amount of the voucher. Such vouchers could be issued in the first instance at a discount. In Argos Distribution Ltd v Customs & Excise  STC 1359, the Court of Justice held that the consideration for the supply of goods by means of the voucher was the amount paid on issue and not the value of the goods or services for which it was redeemed. So goods supplied by Argos on the redemption of face value vouchers were treated as supplied not for the amount stated in the voucher but for the lower amount at which Argos had issued the voucher to an intermediary (often an employer who distributed the vouchers to his employees as a bonus). This produced some difficult policy options for Customs & Excise and their counterparts in other member states. To tax the voucher on the ultimate sale would risk the loss of tax where the voucher was issued at a discount. To tax the ultimate supply risked the complete loss of tax if the party making the supply did not account for the VAT (if any) due on that supply. To tax both the supply of the voucher and the ultimate supply risked double taxation. Member states might also take the view that the risks were different according to whether the vouchers were credit vouchers (see para 3 above) or other face value vouchers (which I will call "non-credit vouchers") and accordingly it was open to them to impose VAT on credit vouchers in a different way from the way VAT was imposed on non-credit vouchers. Member states took different approaches to the solution of these problems. Although there has been some expression of wish among the member states to harmonise the rules for charging VAT on the issue of face-value vouchers, as yet this harmonisation has not been achieved. This lack of coordination, however, need not create an insoluble problem for a harmonised system of turnover taxes within the European Union provided the systems adopted by the member states dovetail with each other, i.e. in the present case, if the supply of phonecards or telecommunications services is not subjected to VAT in Ireland, that intermediate supply of the relevant cards or services in the United Kingdom is subjected to VAT here. In other words, the coherence of the system can be maintained provided that, if tax is not paid on the issue of the voucher in one member state, it is paid on the supply of the voucher or on the services for which it is redeemed in another member state. The question then is whether this is what Community law requires.
- ICSIL, which is based in Ireland, issues "multi-functional" "cards. Its cards are issued to distributors in the United Kingdom and sold by them to members of the public in the United Kingdom. Purchasers of the cards can use them either to obtain sports information from a company based in the United Kingdom called Teamtalk.com Ltd ("Teamtalk") or to obtain telecommunications services from a company in Ireland called Interdirect Tel Ltd, ("Interdirect"). They do this by dialling specified access numbers and ten inserting the PIN (Personal Identification Number) shown on their card. ICSIL'S contention is that Interdirect is not liable to account for VAT in the United Kingdom. It accepts that Teamtalk must account for VAT because that is a company in the United Kingdom. ICSIL and Interdirect are part of the same group of companies and the parent company is IDT Corp., established in the USA. Teamtalk is an independent company, which provides its services for reward under an agreement between it and ICSIL. Crucially for the purposes of this appeal, Interdirect is not the issuer of the voucher and the voucher is therefore a credit voucher. In the post-Argos world, the United Kingdom took the policy option of imposing VAT on credit vouchers in a different way from the way VAT was imposed on non-credit vouchers ( see schedule 10A below), and it is the different charging provisions for credit vouchers which have given rise to the problems to which this appeal is directed.
- As a result of the judge's order, ICSIL were successful in its challenge by way of judicial review to the decision by Customs & Excise in its Business Brief 18/04 dated 13 July 2004 and an email from Mr Shipley, an official of Customs & Excise sent on 14 July 2004. In these documents Customs & Excise had taken the view that UK distributors of phonecards issued by ICSIL are liable to account for VAT on the supply to them of the phonecards issued by ICSIL and redeemed by Interdirect, unless and to the extent that such VAT was already accounted for by Teamtalk, by virtue of the provisions of section 8 of, and schedule 10A to, the Value Added Tax Act 1994. The relevant provisions are set out below.
- There have been a number of communications leading to the decision which is challenged in these proceedings. However, it is unnecessary to set out in this judgment the details of the various communications between the parties.
Value Added Tax Act 1994
- Section 1 of the Value Added Tax Act 1994 ("VATA 1994") provides that VAT is to be charged in accordance with the provisions of that Act on the supply of goods or services in the United Kingdom. Section 1(2) further provides that VAT on any supply of goods or services is a liability of the person making the supply. Section 8 contains provisions for a 'reverse charge', that is, for VAT to be the liability of the person receiving the supply. Section 8 of VATA 1994 provides in material part as follows:
"(1) Subject to subsection (3) below, where relevant services are –
(a) supplied by a person who belongs in a country other than the United Kingdom, and
(b) received by a person ("the recipient") who belongs in the United Kingdom for the purposes of any business carried on by him,
then all the same consequences shall follow under this Act (and particularly so much as charges VAT on a supply and entitles a taxable person to credit for input tax) as if the person had himself supplied the services in the United Kingdom in the course or furtherance of his business, and that supply were a taxable supply.
(2) In that section "relevant services" means services of any of the descriptions specified in Schedule 5, not being services within any of the description specified in Schedule 9."
- Telecommunications services are specified in schedule 5 (see para 7A) and they are not excluded by schedule 9.
- Section 96 of VATA 1994 defines VAT as "value added tax charged in accordance with this Act or, where the context requires, with the law of another member State".
- I have referred above to some of the policy options available to the United Kingdom to deal with face value vouchers, particularly following the decision of the Court of Justice in the Argos case which highlighted the tax planning possibilities of the potentially VAT-free discount on issue of the voucher. Originally VATA 1994, and the provisions of the VAT Act 1983 which it replaced, provided that the consideration for the voucher should be disregarded for the purposes of VAT unless it exceeded the amount stated in the voucher. This meant that, save where the voucher was issued at a premium, VAT was only charged when the voucher was redeemed. However it also meant that any discount given on the supply of the voucher was not subject to VAT and thus the profit made by intermediaries who purchased the vouchers from the issuer at a discount and then resold them at the amount stated in the voucher did not have to pay VAT on the amount of the discount. This led to the insertion of schedule 10A into VATA 1994 by section 19 of, and schedule 1 to, the Finance Act 2003. Schedule 10A applies to all forms of face value voucher and not just phonecards.
- Paragraphs 1, 2 and 3 of schedule 10A provide as follows:-
"Meaning of "face-value voucher" etc
(1) In this Schedule "face-value voucher" means a token, stamp or voucher (whether in physical of electronic form) that represents a right to receive goods or services to the value of an amount stated on it or recorded in it.
(2) References in this Schedule to the "face-value" of a voucher are to the amount referred to in sub-paragraph (1) above.
Nature of supply
The issue of a face-value voucher, or any subsequent supply of it, is a supply of services for the purposes of this Act.
Treatment of credit vouchers
(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."
- Schedule 10A also makes provision for the treatment for VAT purposes of the issue of non-credit vouchers. The scheme of the charging provisions is on the face of it similar, but it is only the first issue and not the subsequent supply of the voucher that is disregarded for the purposes of the application of VATA 1994 (and then only to the same extent as credit vouchers under para 3(3) of schedule 10A). If the phonecards issued by ICSIL were non-credit vouchers, no question could have arisen of the supply of phonecards by UK distributors to members of the public in the United Kingdom without charging VAT.
- The crucial part of schedule 10A for the purposes of this appeal is para 3(3). The supply of a credit voucher is VAT-free save to the amount that the consideration exceeds the face value of the voucher (para 3(2)) unless the redeemer of the voucher fails to account for VAT (para 3(3)). Paragraph 3 catches supplies of vouchers by persons other than the original issuer, including sale by the UK distributors to members of the public in the United Kingdom of phonecards sold by ICSIL in Ireland. But the consideration received by the distributors will not be disregarded under the "disregard" in para 3(2) if Interdirect, which redeems the phonecards, fails to account for any of the VAT due on the "supply of …[telecommunications] services to the person using the voucher to obtain them.". Thus paragraph 3 provides a form of Morton's fork for the payment of VAT on taxable supplies of goods and services by the redemption of credit vouchers. Either VAT is paid by the redeemer of the credit voucher or, if the redeemer of the credit voucher "fails to account" for the VAT "due", it is paid by the issuer or the distributor of the voucher in the United Kingdom. The question, then, is whether like the original Morton's fork those options cover all the possibilities regarding taxable supplies or whether on the true interpretation of para 3(3) Interdirect does not "fail […] to account for the VAT due…" because redemption takes place in Ireland where the supply is not subject to VAT.
The Sixth Directive
- Many of the provisions of VATA 1994 are designed to implement the provisions of the Sixth Directive. This is one in a series of directives on the harmonisation of the laws of the member states relating to turnover taxes.
- The recitals in the preamble to the Sixth Directive make it clear that the objectives of the Directive include the avoidance of the distortion of competition by reference to the origin of goods or services and the harmonisation of the rules for VAT:
"Whereas the Decision of 21 April 1970 on the replacement of financial contributions from Member States by the Communities' own resources (O.J. L 94, 28.4.70,p.19) provides that the budget of the Communities shall, irrespective of other revenue, be financed entirely from the Communities' own resources; whereas these resources are to include those accruing from value added tax and obtained by applying a common rate of tax on a basis of assessment determined in a uniform manner according to Community rules;…
…whereas it should be ensured that the common system of turnover taxes is non-discriminatory as regards the origin of goods and services, so that a common market permitting fair competition and resembling a real internal market may ultimately be achieved;…
Whereas it should be specified which persons are liable to pay tax, in particular services supplied by a person established in another country…"
- One of the recitals in the preamble to the Sixth Directive deals with the harmonisation of rules as to the place of supply. It provides:
"Whereas the determination of the place where taxable transactions are effected has been the subject of conflicts concerning jurisdiction as between Member States, in particular as regards supplies of goods for assembly and the supply of services; whereas although the place where a supply of services is effected should in principle be defined as the place where the person supplying the services his principal place of business, that place should be defined as being in the country of the person to whom the services are supplied, in particular in the case of certain services supplied between taxable persons where the cost of the services is included in the price of goods;…"
- Article 2 of the Sixth Directive provides that:
"The following should be subject to value added tax:
1. the supply of goods or services effected for consideration within the territory of country by a taxable person acting as such; . . ."
- Article 4 defines taxable person and economic activities as follows:
"1. "Taxable person" shall means any person who independently carries out in any place any economic activities specified in paragraph 2, whatever the purpose or results of that activity.
2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions….."
- The United Kingdom distributors of the phonecards are clearly taxable persons.
- By virtue of article 6, the "supply of services" means any transaction which does not constitute a supply of goods within article 5. The supply of sports information and telecommunications services constitutes the supply of services for the purposes of article 6. When a person purchases a phonecard issued by ICSIL he becomes entitled at his option to the supply of sports information or telecommunications services.
- Article 9 is particularly important on this appeal, and sets out what I will call 'the place of supply rules' applying to the supply of services. As indicated in the recital quoted above it provides that in general the place of supply is where the supplier is established but that there are exceptional situations. The critical provisions of which the most important are (1) and (2)(c), 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.
(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 paragraph 2(e), except for the services referred to in the last indent [electronically supplied services] when supplied to non-taxable persons, and also with regard to the hiring out of forms of transport 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…."
The judge's judgment
- The essence of the dispute before the judge was whether the supply of phonecards to members of the public within the United Kingdom was liable to VAT in so far as the services provided were telecommunications services. Customs & Excise submit that it is a rule of the Sixth Directive that the supply of telecommunications services within the Community should be subject to VAT. ICSIL, however, relied on the disregard in paragraph 3(3) of schedule 10A.
- In paragraph 33 of his judgment, the judge held that the central dispute turned on the principle to be derived from the Sixth Directive as to the extent of the right conferred, or indeed duty placed, on a member state to interpret its legislation so as to avoid non-taxation of a supply falling within the charge to VAT under the Sixth Directive. The judge referred to Marleasing S.A. La Commercial Internacional de Alimentation S.A. C-106/89  ECR 1-4135 ("the Marleasing case"), Centrosteel Srl v Adipol GmbH  ECR 1 6007 and Webb v EMO Air Cargo Ltd No.1)  1 WLR 49 and (No 2)  1 WLR 145. The judge noted the submission of Customs & Excise that:
"the wording and purpose of the Sixth Directive are clear. The supply of telecommunications services are subject to VAT. Such a purpose cannot be defeated by the mere device of supplying the service on the redemption of a previously supplied phone card. There are three important objectives within the Sixth Directive, namely the prevention of avoidance of tax, the prevention of avoidance of distortion of competition and the preservation of neutrality. . . . " (judgment, para 44)
- The judge held, however, that the essential difficulty lay in the wording and purpose of article 9. He held that the provisions of that article were designed to avoid conflicts of jurisdiction. He referred to the decision of the Court of Justice in Jurgen Dudda v Finanzamt Bergisch Gladbach, case C-327/94  ECR 1-4959 at para 20.
- The judge held:
"50. The scheme of the Sixth Directive and, in particular of Article 9, is to provide a territorial basis for jurisdiction to charge VAT. Each Member State is responsible for charging tax due on a supply where that supply falls within its jurisdiction. There is no mandate to be found for imposing tax on a supply which falls within the jurisdiction of another Member State but which that other Member State has not imposed. In short, I can discern no obligation within the Sixth Directive imposed on the United Kingdom to tax a supply of a telecommunications service from an establishment in Ireland to an end-user in the United Kingdom unless that end-user is a taxable person within the meaning of Article 9(2)(e), in other words, that the service is supplied to a business user in the United Kingdom.
51. Mr Parker QC sought to meet those arguments by contending that since the place of supply rules in Article 9 are themselves designed to prevent non-taxation, they cannot be prayed in aid to achieve that purpose. But as already recalled, the European Court of Justice in Dudda observed that the avoidance of non-taxation is only an explicit objective in a specified situation. The difficulty in the instant case is that the avoidance of non-taxation can only be achieved at the cost of disregarding the rules of conflict which delimit the powers of Member States. I refer, in particular, to a passage on which Mr Parker relied at Paragraph 12 of the Commission of the European Communities v Kingdom of Spain  ECR 1 5997 in which the Court said:
"that Article [9(2)(e)] constitutes a rule of conflict which determines the place of taxation of advertising services and, consequently, delimits the powers of the Member States. It follows that 'advertising services' is a Community concept which must be interpreted uniformly in order to avoid instances of double taxation or non-taxation which may result from conflicting interpretations."
52. It seems to me that the flaw in the Commissioners' contentions lies in the fact that there is nothing within the Sixth Directive which confers a power, let alone imposes an obligation on the United Kingdom to charge tax on Interdirect's supply of telecommunications to an end-user. Thus it profits the Commissioners nothing to seek to interpret Paragraph 3 consistently with the Sixth Directive. Absent any principle empowering or requiring the United Kingdom to charge VAT, in circumstances where under Article 9(1), the place of supply was Ireland, Paragraph 3(3) cannot be construed as if Interdirect had failed to account for any VAT due under the Sixth Directive or in the European Union. Under the Sixth Directive the United Kingdom has no right, nor any obligation, to impose a charge on a supplier from Ireland which does not fall within Article 9(2)(e).
53. Such a conclusion is not inconsistent with the jurisprudence of the European Court of Justice in relation to attempts by one Member State to impose VAT in order to avoid non-taxation. In Dudda, to which I have already referred, the court was concerned with the supply of sound engineering for artistic or entertainment events. Under Article 9(2)(c) the place of supply was the place of the event. Germany thought that such an approach might lead to a tax avoidance by highly mobile providers of services and sought to interpret Article 9(2)(c) in a way which interpreted ancillary services as those provided by the artists themselves. On that interpretation the supply of acoustic services took place in the Member State where the supplier was established. The Court rejected that argument and concluded that the services were ancillary, notwithstanding the potential of the non-taxation. . . .
57. I conclude that the jurisprudence does not reveal any support for the principle which permits the United Kingdom to impose VAT on a supply from Ireland where the place of supply is determined by Article 9(1) and not by Article 9(2)(e).
58. In those circumstances I conclude that Paragraph 3(3) cannot be construed so as to regard Interdirect as having failed to account for any of the VAT due on the supply of telecommunications services. Paragraph 3(3) is consistent with my construction of the Sixth Directive. It is only possible to determine whether a person has failed to account for any VAT due once the place of supply is determined according to the provisions of Article 9. Tax was not due in Ireland, the place of supply, it was not due in the United Kingdom because Article 9(2)(e) did not apply and the United Kingdom was not the place of supply.
59. It will be apparent that had I been able to identify the principle for which Mr Parker contends with the Sixth Directive, it may have been possible to construe the domestic legislation in the way suggested. Mr Lasok QC, on behalf of the claimants, submitted that the words in Paragraph 3(3) cannot be so construed because to do so is to stretch the Marleasing principle too far. He referred to the opinion of the Advocate General in Scotch Whisky Association v COFEPP  ECR 1 4571 at Paragraph 18:
"However, it is a fundamental principle of statutory interpretation that words which do not require interpretation, because they are perfectly clear, should not be distorted under pretence of interpretation.
60. He also referred to the Federal Republic of Germany v Commission  ECR 1011261 in which at paragraph 72 the Court observed:
". . . It is important to bear in mind that the need to ensure legal certainty means that rules must enable those concerned to know precisely the extent of the obligations they impose on them. The Commission thus cannot choose, at the time of the clearance of EAGGF accounts, an interpretation which departs from and consequently is not dictated by the normal meaning of the words used."
61. I do not regard the wording of Paragraph 3 to be such as to preclude the possibility of applying a community principle, if such a principle enabled the United Kingdom to charge VAT as if the supply fell within Article 9(2)(e) where it was not charged to tax in accordance with 9(1). But since there is no principle, in my view the question, whether the suggested construction goes beyond any meaning which the words can bear, need not be further elaborated.
62. Nor would I have regarded the principle of legal certainty as precluding the Commissioners' construction. If there was a principle which enables the United Kingdom to tax the supply of telecommunications service from Ireland to and end-user in the United Kingdom but outwith 9(2)(e), then I do not see how the principle of legal certainty could have any application. The only certainty would be that that principle would be applied. . .
. . .
67. In those circumstances the United Kingdom is not entitled to charge VAT on the supply of telecommunications services by Interdirect to those who redeem ICSIL's multifunctional cards purchased from retailers with the United Kingdom. Accordingly, this application succeeds."
- The issues which arise on this appeal may be formulated as follows:
i) Are the avoidance of non-taxation, the avoidance of double taxation and the prevention of the distortion of competition general principles of the Sixth Directive?
ii) If the answer to the first question is yes, and leaving on one side the possible impact of the place of supply rules, are any of those principles violated by the conclusion that the supplies to the UK distributors of phonecards in this case are not subject to VAT?
iii) If the answer to the second question is yes, are those principles excluded by the place of supply rules in this case?
iv) If the answer to the third question is no, should national implementing legislation be construed so far as it can in accordance with those principles?
v) If the answer to the last question is yes, can paragraph 3(3) of schedule 10A be interpreted so as to be compatible with those principles and, if so, is the effect that the disregard in paragraph 3(2) is inapplicable where the supply of telecommunications by Interdirect is not liable to VAT under Irish law?
- It is necessary to amplify and explain the first question. It involves a question of the interpretation of the Sixth Directive. The principle of the avoidance of non-taxation, as sought to be applied in this case, would prevent supplies that the Sixth Directive stipulates are taxable supplies from being tax-free because they are cross-border transactions. The second principle which the Customs & Excise invoke in this case is the principle of avoidance of double taxation. This principle is one which ought not to require a high burden to prove since, in normal circumstances, it would be difficult to conceive that the Sixth Directive intended the same supply to be taxable more than once. As to the distortion of competition, this can occur if the same type of transaction is treated in different ways for VAT purposes so as to give a competitive advantage to those who can take advantage of the more beneficial approach.
Submissions - i) Are avoidance of non-taxation, avoidance of double taxation and the prevention of the distortion of competition general principles of VAT law?
- Mr Nigel Pleming QC, for Customs & Excise, submits that the avoidance of non-taxation, the avoidance of double taxation and the prevention of the distortion of competition are all "core principles" of the VAT system. Mr Pleming submits that the principle of avoidance of non-taxation is to be found in article 2 of the First EC Directive on VAT (67/227/EEC) which provides:
"On each transaction, value added tax, calculated on the price of goods or services . . . should be chargeable after deduction of the amount of value added tax borne directly by the various cost components . . ."(emphasis added)
- In this article the word "transaction" refers to any transaction that is not exempt or outside the scope of VAT.
- Mr Pleming relies generally on the dictum of the Court of Justice about the need for uniform interpretation of terms used in the Sixth Directive on paragraph 12 of Commission of the European Communities v Kingdom of Spain, set out in paragraph 51 of the judge's judgment (para 26, above), as supporting the existence of the avoidance of non-taxation and the avoidance of double taxation as general principles of VAT law. He further submits that the principle of avoidance of non-taxation is also clear from substantive provisions of the Sixth Directive, for example articles 13, 14(1), 15(1) and 28c.
- As to the need for VAT to be neutral in its effect as between transactions of the same kind so as not to distort competition, Mr Pleming relies on various provisions of the Sixth Directive and in addition on the judgment of the Court of Justice in Carpaneto  ECR 3233 that:
". . . with a view to ensuring the neutrality of tax, which is the major objective of the Sixth Directive." (para 22)
- Mr Pleming submits that, if the judge's conclusion is correct, the United Kingdom is bound to amend paragraph 3 of schedule 10A because Parliament has exceeded its powers to relieve vouchers from VAT because the provisions of schedule 10A result in non-taxation. He draws attention to the fact that ICSIL does not challenge the fact that schedule 10A could be amended to achieve the result that the supply of the phonecards by UK distributors which are later redeemed against telecommunications services provided by Interdirect to end-users in the United Kingdom and he submits that this is a recognition by ICSIL of the principles of VAT law for which he contends.
- The judge accepted the principles of VAT law for which Mr Pleming contends, and ICSIL does not challenge the judge's conclusion on this point. Its real challenge is to the applicability of the principles in the way for which Customs & Excise contend. ICSIL's approach on this appeal is in essence that the judgment of the judge should be upheld for the reasons he gives.
Submissions - ii) Are the general principles violated by the judge's conclusion?
- It is common ground that the supply of telecommunications services is a taxable supply under the Sixth Directive so it must follow that, if the principle of the avoidance of non-taxation as described above is a principle of VAT law and applies in the way for which Customs & Excise contend, it is violated in the present case by the supply by Interdirect of telecommunications services to end-users of the phonecards issued to the UK distributors in this case. The judge generally accepted the existence of the three principles relied on by Customs & Excise in this case. (However, he went on to hold in paragraph 50 of his judgment that the principle of the avoidance of non-taxation did not require Customs & Excise to subject the supply of a telecommunications service by a supplier outside the United Kingdom to VAT in the United Kingdom but this is the question considered under the next subheading in this summary of counsels' submissions).
- Mr Pleming submits that the judge was right to conclude that the arrangements set up by ICSIL are contrary to the principles of VAT law identified above. Mr Pleming submits that, if the supply of telecommunications services by Interdirect to end-users of phonecards in the United Kingdom is VAT free, the first principle mentioned above, namely the avoidance of non-taxation would be contravened. Mr Pleming further submits that such a result would also infringe the principle of achieving neutrality in VAT in that the supplies would not be VAT neutral because Interdirect would be able to deduct VAT on the inputs/costs components of its telecommunications services but would not have to account for output tax when making the supplies of telecommunications services to use those inputs. The principle of preventing the distortion of competition would also be violated since the supplies would distort competition between Interdirect and other suppliers of telecommunications services who do not do so by means of pre-paid phonecards issued in Ireland.
- Mr Pleming submits that, if Interdirect supplied telecommunications services direct to the consumer, those services would be subject to VAT whether the consumer was in the United Kingdom or Ireland (Sixth Directive, article 9(1)). The same would be true if the recipient of the telecommunications services was a business trader in the United Kingdom (Sixth Directive, article 9(2)(e)). Mr Pleming submits that in those circumstances, the supplier in Ireland would not account for VAT in the United Kingdom but the business trader receiving the supplies for business purposes in the United Kingdom would account for output VAT on the value of the supply received and subject to the normal rules could deduct the VAT so accounted for as input VAT (VATA 1994, section 8). This achieves the same fiscal result as if the trader had received the supply of telecommunications from a UK supplier.
- Mr Pleming submits that the issue of a phonecard should not fundamentally affect the liability to VAT of telecommunications services. He submits that the mere issue of the phone card should not mean that no VAT is due on the supply of the identical telecommunications services.
- Mr Pleming emphasises that it is no part of Customs & Excise's case that Interdirect, a registered person in Ireland, should be subject to tax in the UK. The judge was wrong on this (judgment, para 52). Customs & Excise contend that it is the UK distributors who must account for VAT.
- Mr Pleming submits that ICSIL's interpretation of paragraph 3 of schedule 10A has the result of distorting competition. He accepts that, in some circumstances, the principles which he has identified cannot override the clear wording of the Sixth Directive. In those circumstances the Court of Justice may leave it to member states to change the Directive. However, this is not a case where the general principles are overridden by the express provisions of the Directive.
- Mr Lasok submits that the general principles of VAT law apply only to the harmonised area of VAT law: see paragraphs 37 and 38 of the judgment of the Court of Justice in Ideal Tourisme S.A. v Belgium Case C-36/99  ECR 1-6049. In that case, a coach operator relied on the principle of equal treatment and contended that VAT should be the same rate for coach travel as for air travel. He was unsuccessful because the disparity was the result of provisions of Belgian law which predated the adoption of the Sixth Directive and which were outside the scope of the harmonised rules in the Sixth Directive. Mr Lasok submits that the effect of the decision is that the Sixth Directive allows member states to retain other provisions in their legislation and only requires partial harmonisation. He, therefore, submits that the general principles of VAT law apply only to Community legislation. He submits that it is crucial to know if the rules in question are harmonised. He submits that the VAT treatment proposed by Customs & Excise is incompatible with the harmonised rule as to place of supply. He further submits that the treatment of vouchers by Irish law and the treatment of vouchers by United Kingdom law are both permitted by the Sixth Directive and that there is no rule of VAT law that the United Kingdom must impose VAT on a taxable supply in Ireland which by virtue of Irish law happens to be VAT-free. Mr Lasok also relies on F & I Services Ltd v Customs & Excise  STC 147, a decision of this court, in which Robert Walker LJ, with whom Sedley LJ and Lightman J agreed, observed that the provisions of paragraph 5 of schedule 6 to the Finance Act 2003 (which preceded schedule 10A) "had no obvious source in the Sixth Directive" ().
- Mr Pleming submits that the decision in the Ideal Tourisme case is not relevant. In that case the Belgian authorities were given express authority to exclude particular services. It had had that authority from before the inception of the Community system of VAT. This is not an Ideal Tourisme situation because paragraph 3(2) of schedule 10A was disapplied by paragraph 3(3) to avoid double taxation.
Submissions - iii) do the place of supply rules exclude the general principles of VAT law?
- On the place of supply rules, Mr Pleming submits that the judge wrongly approached this case on the basis that Customs & Excise sought to impose VAT on the supply by Interdirect to UK end-users. This is not what Customs & Excise submit: they seek to impose VAT on the intermediate supplies of phonecards which take place in the UK. The judge was therefore in error in concluding that the place of supply rules prevented the imposition of VAT in this case.
- Mr Pleming also relies on the judgment of the Court of Justice in RAL (Channel Islands) Limited v Customs & Excise C-452/03, 27 January 2005, paragraphs 23 and 24, and submits that the provisions of article 9(1) constitutes a residual provision.
- Mr Pleming submits that the judge was wrong to conclude that the submissions of Customs & Excise were inconsistent with the place of supply rules in article 9 of the Sixth Directive. He submits that the place of supply of phonecards issued to distributors in the United Kingdom who are registered businesses is in the United Kingdom by virtue of article 9(2)(e). The phonecards are no more than prepayments for telecommunications services and therefore article 9(2)(e) applies. In consequence, the 'reverse charge' provisions of section 8 of VATA 1994 apply.
- Moreover, on Mr Pleming's submission, it would not be possible for Ireland to tax a supply of services on redemption because on the theory of taxation adopted by it that would constitute double taxation.
- Mr Lasok relies on article 9(1) and submits that article 9(2)(e) does not apply. He further submits that, if a principle exists that domestic legislation is to be interpreted to avoid a situation where there is no tax, that principle can only be applied in accordance with the place of supply rules. He submits that the judge was correct in his conclusion that VAT could not be imposed on the supply of phonecards in this case because of the place of supply rules. He submits that it would be wrong to take weak principles as to the avoidance of non-taxation or double taxation, or as to the distortion of competition, that cede to express provisions in the Sixth Directive and cause them to override the place of supply rules. In support of this submission he relies on the Dudda case, the ARO Lease BV v Inspecteur der Belastingdienst case C-190/95  ECR 1- 4883 and Commission v France case C-429/97  ECR 1-637. Unless article 9 applies, the transaction cannot be taxed.
- Mr Lasok accepts that the UK legislature could exempt a transaction in order to eliminate double taxation. However, it must accept the consequence that it can only tax a supply if that tax is due in accordance with the law governing that supply. However, he accepts that the problem in the present case could be resolved by appropriate legislation. In this case, however, article 9(1) prevents Customs & Excise from taxing the consumer here. But, without amending legislation, Customs & Excise are in effect trying to collect Irish VAT. The policy choice made by the United Kingdom was rational because only when a supply is made is it known what the supply consists of and therefore paragraph 3 of schedule 10A represents the correct tax treatment.
Submissions - iv) should national implementing legislation be construed in accordance with the general principles of VAT law?
- Mr Pleming submits that the court must construe paragraph 3(3) of schedule 10A so far as possible in accordance with Community law. In support of this proposition he cites the following authorities: Marleasing SA v La Commercial Internacionale de Alimentación SA, Case C-106/89  ECR 1-4135 ; Centrosteel Srl v Adipol GmbH, Case C-456/98  ECR 1-6007; Webb v EMO Air Cargo (UK) Ltd  1 WLR 49; Webb v EMO Air Cargo (UK) Ltd (No. 2)  1 WLR 1454; Litster and others v Forth Dry Dock & Engineerings Co and another  1 AC 546; Mark Alderson & others v Secretary of State for Trade and Industry  EWCA Civ 1767 and Ghaidan v Godin – Mendoza  2 AC 557.
Submissions – v) Can paragraph 3(3) of schedule 10A to VATA 1994 be interpreted so as to be compatible with the general principles of VAT law and if so is the disregard in paragraph 3(3) inapplicable where the supply of phonecards is not liable to tax under Irish law?
- This problem raises the question of another principle of European Union law namely the principle of legal certainty. It is common ground that the principle of legal certainty forms part of Community law in addition to the VAT principles identified above.
- On legal certainty, Mr Pleming accepts that a taxpayer can rely on a lacuna in the legislative framework for VAT but submits that if schedule 10A para 3 is properly construed, there is no lacuna. He submits that the judge was right to conclude that the principle of legal certainty does not undermine Customs & Excise's case. On the contrary, the judge rightly concluded that if the VAT principles were well founded their application accorded with the principle of legal certainty (judgment, para 62).
- As to legal certainty Mr Lasok's submissions are as follows. In relation to legislation that imposes obligations on persons, Mr Lasok relies on the fact that the Court of Justice has frequently employed the following formula:
" . . .it is important to bear in mind that the need to ensure legal certainty means the rules must enable those concerned to know precisely the extent of the obligations which they impose on them. The Commission thus cannot choose . . . an interpretation which departs from and consequently is not dictated by the normal meaning of the words used."
- Mr Lasok refers by way of example to Germany v Commission  ECR 1-11261, para 72 (page 11303). In Meico-Fell v Hauptzollamt Darmstadt  ECR 1-5569, para 11 (page 5587) the Court of Justice held that the requirement for legal certainty is particularly important when rules are involved which entail financial consequences for economic agents.
- Mr Lasok submits that, in the context of VAT, the Court of Justice has refused to give an expanded construction to the words used in Community legislation even in order to deal with perceived avoidance – or where a narrower construction would not reflect "economic reality" – and even when the provision in question is an anti-avoidance provision: see Dudda v Finanzamt Bergisch Gladbach  ECR 1-4595, para 32 (page 4627); ARO Lease v Inspecteur der Belastingdienst  ECR 1-4383, paras 23-26 (pages 4407-4408); Commission v France  ECR 1-637, paras 51-52 (page 669). He submits that it appears from para 41 of the judgment in the last case that article 9 of the Sixth Directive, which is the subject of the cases cited here, contains an anti-avoidance rule.
- Mr Lasok also submits that in Gemeente Leusden and another v Staatsecretaris van Financien, 29 April 2004, the Court of Justice accepted that a person could take advantage of lacunae in VAT legislation so as to obtain a fiscal benefit, noting that such lacunae can also be closed as long as the Member State concerned acts consistently with the principles of legality, legal certainty and the protection of legitimate expectations (judgment, paras 65 to 81).
Interpretation of schedule 10A under the Marleasing principle
- Mr Pleming submits the judge was right to conclude that it would be possible to construe domestic legislation in the manner for which Customs & Excise intended if the VAT principles identified above were indeed part of Community law arising out the Sixth Directive (judgment, paras 59 and 61). Mr Pleming submits that in para 3(3) of schedule 10A the words "fails to account for any of the VAT due on the supply of those goods and services" should be read on the lines of "does not account for any of the VAT intended by the Sixth Directive to be due on the supply of that type of goods or services". Mr Pleming submits that the definition of VAT in section 96 of VATA 1994 dovetails with his submissions.
- Mr Pleming submits that the purpose of regulation 3(3) of schedule 10A is to avoid double-taxation. However, that rationale does not apply if in fact the supplier is not itself subject to VAT when it redeems the service. As to this submission, Mr Lasok submits that the scheme of para 3 of schedule 10A is that the VAT is to apply to credit vouchers when the voucher is redeemed. It follows from this that logically it is the place of supply of services on redemption of the voucher that should determine whether or not VAT is due. Accordingly, he submits that it is the place of the supply of services on redemption of a credit voucher and not the avoidance of double-taxation which is the rationale underlying para 3 of schedule 10A.
- Mr Pleming relies on the recent decision of the House of Lords in Ghaidan v Godin-Mendoza. Mr Lasok submits that the principle of interpretation applied in the Ghaidan case does not apply on the present appeal because there is no provision of Community law at stake. Schedule 10A does not implement any part of the Sixth Directive. If he is wrong on this, then it follows from the Ghaidan case that the court should only read in a provision of Community law if that reading in is justified by the language and substance or grain of para 3 of schedule 10A.
- I now turn to Mr Lasok's more detailed submissions on the interpretation of schedule 10A by reference to the Marleasing principle. Mr Lasok submits that the express provisions of schedule 10A must prevail over any general principles of VAT law. Those principles cannot be invoked to override the express provisions of national implementing legislation.
- Mr Lasok relies on the literal meaning of the words "VAT due" in schedule 10A. He submits that these words can only be construed as meaning VAT due in the United Kingdom, not VAT due anywhere in the European Community. He asks rhetorically what would happen if Parliament had specifically legislated that VAT should not be charged in a situation where it was due to be charged under the Sixth Directive. He further points out that the definition of VAT in section 96 does not refer to VAT "intended by the Sixth Directive to be charged".
- Mr Lasok points out that para 3(3) of schedule 10A can operate in a draconian way, for example, where the end-user fails to pay VAT because it has become insolvent. No one can know in advance of the use of a card how it will in fact be used. It might be used wholly to obtain sports information or to obtain telecommunications services from Interdirect or it might be used for a mixture of services. Alternatively, it might not be used at all and might be lost. He submits that the implications of the approach of Customs & Excise is that, for instance, if Teamtalk makes an error and fails to account for VAT, the UK distributor becomes bound to pay all the VAT. Moreover, he is in no position to know whether the charge is correct or not. He submits this is serious for suppliers because the charge may be retrospective. This is particularly true if the court gives para 3 of schedule 10A a purposive effect.
- As to the draconian nature of para 3(3), Mr Pleming submits that the UK distributor must know that there is a risk of assessment if the redeemer fails to account for VAT. VAT would not be charged on cards that were lost or never used to access telecommunications services. Nor would it be imposed to recover VAT already accounted for by the end-supplier,
- Mr Lasok submits that if any of the principles of VAT identified by Mr Pleming applies there is no factual basis for asserting that they had been infringed, or that they fall to be applied in conjunction with other principles of Community law and in any event they are weak principles that do not override the express wording of schedule 10A. He relies on Scotch Whisky Association v COFEPP and others  ECR 1-4571, where the Advocate General noted: " . . . it is a fundamental principle of statutory interpretation that words which do not require interpretation, because they are perfectly clear, should not be distorted under pretence of interpretation" (para 18 of his Opinion, page 4577). The Court of Justice endorsed that part of the Advocate General's Opinion in para 33 of its judgment (page 4601).
- In any event, since para 3 of schedule 10A does not constitute a directly effective Community law provision, Community law can only assist in the interpretation of schedule 10A if that provision is itself ambiguous and if the words and purpose of Community law can be respected. Mr Lasok submits that the wording of para 3 is clear and permits of no other interpretation and that to interpret them in the manner suggested by Customs & Excise would offend the words and scheme of the Sixth Directive by abrogating article 9. Accordingly, on his submission there is no warrant for any reading in on any linguistic or substantive approach or any basis which the Ghaidan case requires.
- Mr Lasok submits that the court's ability to read in Community law is less powerful in circumstances where there is no directly effective Community law right in play. In support of this proposition, Mr Lasok relies on the Factortame case  2AC 85 and Imperial Chemical Industries plc v Colmer (No. 2)  1 WLR 2035.
- Mr Lasok submits that there is no authority to support the proposition that the supply of telecommunications services in the European Union needs to be subject to VAT. He submits that member states' competence to tax transactions is exclusive. He submits that territorial nature of competence is inevitable because of the nature of European Union fiscal legislation. He submits that VAT remains a domestic tax although the Sixth Directive has eliminated disparities.
Two levels of interpretation
- Before I deal with the specific issues under which I have grouped the submissions by counsel, I propose to set out the background against which the present problem arises.
- There are two different levels at which the court undertakes the task of interpretation in this case. The first level is that of the Sixth Directive, because, although that has no legal force as such in the United Kingdom, it is now well-established that the court must interpret domestic legislation in accordance with any applicable European directive. So the Court has to satisfy itself as to the meaning of that underlying legislation. The second level at which the court must undertake the task of interpretation is at the level of the VATA 1994. This of course is domestic law. The former task must be carried out in accordance with the principles laid down by the Court of Justice, which is the final arbiter on what Community legislation means. The latter task, however, is conducted under the principles of domestic law but for the purpose not of interpreting the statute in the ordinary way but of fulfilling the requirement of European Union law that a national court should interpret a statute which implements a directive, so far as possible, in the light of the wording and purpose of that directive.
Interpretation of European Union directives
- In Srl Cilfit v Minister of Health Case 283/81  ECR 3415, the Court of Justice gave the following guidance on the interpretation of directives:
"18. To begin with, it must be borne in mind that Community legislation is drafted in several languages and that the different language versions are all equally authentic. An interpretation of a provision of Community law thus involves a comparison of the different language versions.
19. It must also be borne in mind, even where the different language versions are entirely in accord with one another, that Community law uses terminology which is peculiar to it. Furthermore, it must be emphasised that legal concepts do not necessarily have the same meaning in Community law and in the law of the various Members States.
20. Finally, every provision of Community law must be placed in its context and interpreted in the light of the provisions of Community law as a whole, regard being had to the objectives thereof and to its state of evolution at the date on which the provision in question is to be applied."
- When European Union legislation has to be examined, the courts often have no difficulty in finding that the meaning is clear on any basis. The English courts have with practice also become accustomed to looking at the travaux préparatoires and asking advocates to produce them. They are also becoming more accustomed to looking at a few of the different language versions of directives. However, the guidance in the Cilfit case is not always easy to apply. The number of different language versions that the court can examine is limited. The court also rarely has the benefit of decisions on European Union legislation in other member states. This is in that respect a case in point because in determining whether the Sixth Directive contains the general principles for which the Customs & Excise contend neither side has asked us to look at other language versions of the directive or decisions in the courts of other member states.
- On the other hand, the Cilfit case makes a point that is of particular importance on this appeal, and that is that the court should have regard to the objectives of the legislation. English statutes rarely contain statements of their objectives because they are often found not to be reliable guides to the detailed points of interpretation that tend to arise on English statutes. However European Union directives frequently have long preambles setting out the purposes or reasons for the measures and what it is intended to achieve. This point is an indication that the objectives of a measure have a greater normative force under Community law than they would under English law.
- It has been said European Union legislation is "a negotiated law" (Jean-Claude Piris, The Legal Order of the European Community and of the Member States: Peculiarities and Influences in Drafting). It is often the product of compromise. In the context of the European Union, legislation has to be negotiated between different sovereign states with separate interests. For this reason, it may not be possible to obtain a precise text. To obtain agreement, an element of ambiguity must be left for later resolution. The very nature of this kind of legislation places a greater burden on courts than domestic legislation where the scheme of the legislation is generally worked out in great detail.
Interpretation of domestic legislation in accordance with European Union directives (the Marleasing principle or principle of conforming interpretation)
- The Sixth Directive was promulgated by the Council of Ministers under the EC treaties. Under what is now article 249 of the EC Treaty, a directive is binding as to the result to be achieved but needs to be implemented in a member state to have effect. The effect of a directive in the United Kingdom is governed by the legislation bringing the EC treaties into force in the United Kingdom, namely section 2 of the European Communities Act 1972. Section 2(1) of the 1972 Act incorporates obligations under the EC Treaties into domestic law. It also provides a means for the incorporation of later directives into domestic law by secondary legislation. Thus, section 2(2) of the 1972 Act provides that designated Ministers can make regulations for the purpose of implementing any Community obligation of the United Kingdom. Then section 2(4) of the 1972 Act provides:
"… any enactment passed or to be passed, other than one contained in this Part of this Act, shall be construed and have effect subject to the foregoing provisions of this section;"
- The 1972 Act thus contains the mandate for the English courts to interpret domestic legislation in accordance with applicable European Union directives. The courts may have to interpret domestic legislation in this way because it was adopted specifically in order to implement such directives. It may also have to interpret legislation in accordance with European Union law even though it (the domestic legislation) was enacted for another purpose if it in fact contains the provisions which have to be enacted in the member state to implement a directive or which, if the directive were properly implemented, would be affected by it, and the date for implementing the directive has passed.
- The approach of the English courts when interpreting UK legislation designed to give effect to Community legislation is to construe the English legislation so far as possible so as to make it compatible with the Community legislation. This is the approach that the English courts adopt to legislation implementing international treaties generally. In addition, when Parliament recently incorporated the European Convention on Human Rights into domestic law, it took the same formula and used it to impose an obligation on English courts to interpret domestic statute law, so far as possible, compatibly with human rights (Human Rights Act 1998, section 3).
- The leading authority on the interpretation of the legislation in the light of European Union directives is that of Litster v Forth Dry Dock & Engineering Co Ltd  1 AC 546. The Litster case involved the Acquired Rights directive (77/187/EEC). This directive is designed to safeguard the rights of employees when their employer's undertaking is transferred to another company. The persons protected by the United Kingdom implementing legislation were persons who were "employed immediately before the transfer". The employer in question became insolvent and had entered receivership. The issue was whether this wording quoted above covered employees who were dismissed one hour before the transfer by receivers. The House of Lords held that, to give effect to the underlying directive as interpreted by the Court of Justice, there had to be read into the words " a person so employed immediately before the transfer" the words "or who would have been so employed if he had not been unfairly dismissed in the circumstances described in regulation 8(1)". In other words, the House of Lords made a significant change to the wording of the legislation by adding words that were not there. This is not possible in statutory interpretation under purely domestic law. If the courts took the same approach to a purely domestic statute, it would probably be regarded as impermissible judicial legislation.
- Non-implementation or defective implementation of a European Union directive may lead to liability on the state: Francovitch v Italy  2 CMLR 66. In Alderson v DTI  ICR 512, which also concerned the Acquired Rights Directive, the question arose whether the rights of employees of a local authority were covered by the UK implementing legislation. The local authority was not a commercial undertaking. Only commercial undertakings were included by the United Kingdom implementing legislation. The European Union directive applied to entities pursuing "an economic activity". The Court of Justice later held that the directive was not prevented from applying to not-for-profit ventures. In other words, the directive did not mean what the United Kingdom legislature had thought it meant. As a result, the employees of a local authority, whose business of refuse collection was transferred to a commercial company, sought damages from the UK government. The matter came before this court in circumstances which I need not recount but in the course of its judgment this court observed obiter that its conclusion was that the words "in the nature of commercial undertaking" were "sufficiently imprecise and elastic to enable the regulations in their original form to be construed as having the same scope as the directive" .
- In both the cases cited above, the English courts had the advantage of a preliminary ruling from the Court of Justice. Where there is no preliminary ruling from the Court of Justice and difficulties arise because the case cannot be said to be acte clair, it may be necessary to seek a preliminary ruling from the Court of Justice. Customs & Excise seek a reference for a preliminary ruling if they are unsuccessful on this appeal. In Kobler v Austria  2 WLR 976, the Court of Justice held that in special circumstances a state can be liable if the final court of appeal in a member state declines to refer a question of the interpretation of the EC treaties to the Court of Justice, and takes a wrong view of the EC law. This may lead to national courts taking a more restrictive view of acte clair in the future.
- The Court of Justice lays down the obligations of national courts with respect to European Union legislation. The Court of Justice has held that the national court's obligation is to interpret domestic legislation, so far as possible, in the light of the wording and the purpose of a directive in order to achieve the result pursued by the directive and thereby comply with Community obligations: see Marleasing S.A. v La Commercial Internacional de Alimenation SA at para 8. In this judgment, I refer to this obligation as the Marleasing principle. It is sometimes also referred to as the principle of conforming interpretation. The Court of Justice has held that the obligation may apply even if the relevant legislation was passed before the relevant Community legislation: Webb v EMO Air Cargo (UK) Ltd  QB 718, and see S.Vogenauer, Richtlinienkonforme Auslegung Nationalen Rechts, (1997) ZEuP 158.
- In the recent case of Pfeiffer v Deutsches Rotes Kreuz Cases C-397/01 to C-403/01, the Court of Justice summarised and developed the relevant principles as follows:-
"111. It is the responsibility of the national courts in particular to provide the legal protection which individuals derive from the rules of Community law and to ensure that those rules are fully effective.
112. That is a fortiori the case when the national court is seised of a dispute concerning the application of domestic provisions which, as here, have been specifically enacted for the purpose of transposing a directive intended to confer rights on individuals. The national court must, in the light of the third paragraph of Article 249 EC, presume that the Member State, following its exercise of the discretion afforded it under that provision, had the intention of fulfilling entirely the obligations arising from the directive concerned (see Case C-334/92 Wagner Miret  ECR I–6911, para 20).
113. Thus, when it applies domestic law, and in particular legislative provisions specifically adopted for the purpose of implementing the requirements of a directive, the national court is bound to interpret national law, so far as possible, in the light of the wording and the purpose of the directive concerned in order to achieve the result sought by the directive and consequently comply with the third paragraph of Article 249 EC (see to that effect, inter alia, the judgments cited above in Von Colson and Kamann, paragraph 26; Marleasing, paragraph 8, and Faccini Dori, paragraph 26; see also Case C-63/97 BMW  ECR I-905, paragraph 22; Joined cases C-240/98 to C-244/98 Océano Grupo Editorial and Salvat Editores  ECR I-4941, paragraph 30; and Case C-408/01 Adidas-Salomon and Adidas Benelux  ECR I-0000, paragraph 21).
114. The requirement for national law to be interpreted in conformity with Community law is inherent in the system of the Treaty, since it permits the national court, for the matters within its jurisdiction, to ensure the full effectiveness of Community law when it determines the dispute before it (see, to that effect, Case C-160/01 Mau  ECR I-4791, para 34).
115. Although the principle that national law must be interpreted in conformity with Community law concerns chiefly domestic provisions enacted in order to implement the directive in question, it does not entail an interpretation merely of those provisions but requires the national court to consider national law as a whole in order to assess to what extent it may be applied so as not to produce a result contrary to that sought by the directive (see, to that effect, Carbonari, paragraphs 49 and 50).
116. In that context, if the application of interpretative methods recognised by national law enables, in certain circumstances, a provision of domestic law to be construed in such a way as to avoid conflict with another rule of domestic law or the scope of that provision to be restricted to that end by applying it only in so far as it is compatible with the rule concerned, the national court is bound to use those methods in order to achieve the result sought by the directive.
117. In such circumstances, the national court, when hearing cases which, like the present proceedings, fall within the scope of Directive 93/104 and derive from facts postdating expiry of the period for implementing the directive, must, when applying the provisions of national law specifically intended to implement the directive, interpret those provisions so far as possible in such a way that they are applied in conformity with the objectives of the directive (see, to that effect, the judgment in Case C-456/98 Centrosteel  ECR 1-6007, paragraphs 16 and 17).
118. In this instance, the principle of interpretation in conformity with Community law thus requires the referring court to do whatever lies within its jurisdiction, having regard to the whole body of rules of national law, to ensure that Directive 93/104 is fully effective, in order to prevent the maximum weekly working time laid down in Article 6(2) of the directive from being exceeded (see, to that effect, Marleasing, paragraphs 7 and 13).
119. Accordingly, it must be concluded that, when hearing a case between individuals, a national court is required, when applying the provisions of domestic law adopted for the purpose of transposing obligations laid down by a directive, to consider the whole body of rules of national law and to interpret them, so far as possible, in the light of the wording and purpose of the directive in order to achieve an outcome consistent with the objective pursued by the directive. In the main proceedings, the national court must thus do whatever lies within its jurisdiction to ensure that the maximum period of weekly working time, which is set at 48 hours by Article 6(2) of Directive 93/104, is not exceeded."
- The approach described above makes it clear that, while under European Union law the member states are bound to interpret national legislation so far as possible in conformity with the wording and purpose of a directive, it is for domestic law to determine how far the domestic court can change other provisions of purely domestic law to fulfil this obligation. Thus in this situation the national court is not concerned to ask what interpretative approach is adopted by the courts of the other member states of the European Union. The question how far it can go under the guise of interpretation, and whether it can for instance adopt what would otherwise be regarded as a strained construction, is a matter for domestic law.
- Normally when construing domestic legislation, the English courts must find the meaning of the words which Parliament has used. In the context, however, of legislation which requires to be construed in a way which is compatible with European Union law or with the rights conferred by the European Convention on Human Rights, the English courts can adopt a construction which is not the natural one. The process, however, remains one of interpretation: the obligation imposed by the Court of Justice is only to interpret national law in conformity with a directive "so far as possible". That raises the question when a process ceases to be that of legitimate interpretation and trespasses into the field of lawmaking that is the task of Parliament and not the courts.
- The Court of Justice has now applied the Marleasing principle to framework decisions under the EU treaty: Re Pupino C-105/3, 16 June 2005.
- Mr Lasok has referred the court to the decision of the House of Lords in Imperial Chemical Industries plc v Colmer. In that case, the House of Lords had to consider tax legislation giving consortium relief to companies following a reference to the Court of Justice. The Court of Justice held that the legislation would infringe the right of freedom of establishment conferred by the EC Treaties if relief were denied to companies holding shares wholly or mainly in other companies established in the European Community but not if it were denied to companies holding shares wholly or mainly in other companies established outside the European Community. In fact the appellant did not fall in the protected category but it argued that the legislation had to be interpreted in its case on the basis that it could be interpreted in conformity with Community law. The House of Lords held that it was impossible for the legislation in question to be interpreted so as to distinguish between the two categories of holding company. This case illustrates that there will be cases where the court cannot interpret domestic legislation so as to conform to European Union law.
- However, further guidance is now provided by Ghaidan v Godin-Mendoza. As I have explained above, this was a case under section 3 of the Human Rights Act 1998 and is thus not a case in which the House had to consider the interpretation of legislation so as to make it compatible with the wording and purpose of a directive. However, under section 3 of the 1998 Act, the court has to interpret legislation "so far as possible" in a manner which is compatible with Convention rights. The case is therefore in my judgment authority as to what is "possible" as a matter of statutory interpretation. The similarities in this regard between interpretation under section 3 of the 1998 Act and under the Marleasing principle are illustrated by the fact that Lord Steyn traced the origin of the interpretative obligation in section 3 to the Marleasing case and that both Lord Steyn and Lord Rodger in their speeches relied on (inter alia) the Litster case as demonstrating that the court could read in words in order to interpret legislation under section 3(1) of the 1998 Act. In those circumstances, in my judgment, the guidance given by the House of Lords in that case as to the limits of interpretation can also in general be applied to when the limits of interpretation under the Marleasing principle arise for consideration.
The Ghaidan case
- In Ghaidan v Godin – Mendoza, the statute in question conferred rights of succession in respect of a tenancy on a person who had lived with the deceased original tenant "as his or her wife or husband". The issue was whether this provision applied to same sex couples. If it did not do so, then it discriminated against them in violation of article 14 of the European Convention on Human Rights ("ECHR") read with article 8.The House of Lords held that the statute in question had to apply to the survivor of a same sex relationship as much as it did to a surviving spouse. In the course of reaching that conclusion the courts gave authoritative guidance as to the limits of section 3. The leading speech is that of Lord Nicholls. He held that the effect of section 3 was that the court might be required to depart from the unambiguous meaning of a statute. The question of difficulty was how far the courts should go. He held that the answer to this question did not depend on the actual wording used by Parliament. He continued:
"30. From this is follows that the interpretative obligation decreed by section 3 is of an unusual and far-reaching character. Section 3 may require a court to depart from the unambiguous meaning the legislation would otherwise bear. In the ordinary course the interpretation of legislation involves seeking the intention reasonably to be attributed to Parliament in using the language in question. Section 3 may require the court to depart from this legislative intention, that is, depart from the intention of the Parliament which enacted the legislation. The question of difficulty is how far, and in what circumstances, section 3 requires a court to depart from the intention of the enacting Parliament. The answer to this question depends upon the intention reasonably to be attributed to Parliament in enacting section 3.
31. On this the first point to be considered is how far, when enacting section 3, Parliament intended that the actual language of a statute, as distinct from the concept expressed in that language, should be determinative. Since section 3 relates to the "interpretation" of legislation, it is natural to focus attention initially on the language used in the legislative provision being considered. But once, it is accepted that section 3 may require legislation to bear a meaning which departs from the unambiguous meaning the legislation would otherwise bear, it becomes impossible to suppose Parliament intended that the operation of section 3 should depend critically upon the particular form of words adopted by the parliamentary draftsman in the statutory provision under consideration. That would make the application of section 3 something of a semantic lottery. If the draftsman chose to express the concept being enacted in one form of words, section 3 would be available to achieve Conventional-compliance. If he chooses a different form of words, section 3 would be impotent.
32. From this the conclusion which seems inescapable is that the mere fact the language under consideration is inconsistent with a Convention-compliant meaning does not of itself make a Convention compliant interpretation under section 3 impossible. Section 3 enables language to be interpreted restrictively or expansively. But section 3 goes further than this. It is also apt to require a court to read in words which change the meaning of the enacted legislation so as to make it Convention compliant. In other words, the intention of Parliament in enacting section 3 was that, to an extent bounded only by what is "possible", a court can modify the meaning, and hence the effect, of primary and secondary legislation.
33. Parliament, however, cannot have intended that in the discharge of this extended interpretative function the courts should adopt a meaning inconsistent with a fundamental feature of legislation. That would be to cross the constitutional boundary section 3 seeks to demarcate and preserve. Parliament has retained the right to enact legislation in terms which are not Convention-compliant. The meaning imported by application of section 3 must be compatible with the underlying thrust of the legislation being construed. Words implied must, in the phrase of my noble and learned friend, Lord Rodger of Earlsferry, "go with the grain of the legislation". Nor can parliament have intended that section 3 should require courts to make decisions for which they are not equipped. There may be several ways of making a provision Convention-compliant, and the choice may involve issues calling for legislative deliberation."
- Lord Steyn stressed that the application of section 3 did not depend on the linguistic features of the legislation and that section 3 represented the prime remedy where legislation was not compatible with the ECHR. He declined to formulate precise rules as to when section 3 could be used. Lord Rodger also considered the boundaries of section 3 and gave helpful guidance. He held that in deciding how to interpret the legislation the courts should not produce a meaning which departed substantially from a fundamental feature or cardinal principle of the legislation. Likewise the courts should be less ready to interpret legislation so as to be compatible with Convention rights where there would be important practical repercussions which the courts are not equipped to evaluate.
- The decision in the Ghaidan case is a powerful statement of the court's preparedness to interpret legislation so that it is compatible with human rights. The speeches, all of which repay careful study, contain extremely valuable guidelines. The House of Lords has recognized the force of the mandatory obligation in section 3. However, section 3 permits only interpretation, not the rewriting of legislation which goes beyond mere interpretation. I would add that in section 3 the words "in a way which is compatible with the Convention rights" make it clear that the courts have a choice as to precisely how to interpret the legislation to achieve the objective in section 3, namely that, where possible, the legislation should be compatible with human rights.
- The critical point made by the House of Lords in the Ghaidan case can be found in the passage from the speech of Lord Nicholls which I have set out above. Lord Nicholls accepts that the effect of interpretation in accordance with section 3 of the 1998 Act may be to change the meaning of the legislation but, as he explains, the meaning adopted by the court must not conflict with a fundamental feature of the legislation. He adopts the words of Lord Rodger that the interpretation chosen by the court must "go with the grain of the legislation". Lord Nicholls, Lord Steyn and Lord Rodger all accepted that there would be occasions when the courts could not adopt an interpretation that would make the legislation compatible with Convention rights because that would involve making policy choices which the court was not equipped to make (see  to  per Lord Nicholls,  per Lord Steyn and  per Lord Rodger). It is also clear from the Ghaidan case that the interpretation of legislation under section 3 or the Marleasing principle may involve a substantial departure from the language used though it will not involve a departure from the fundamental or cardinal features of the legislation. It is possible to read the legislation up (expansively) or down (restrictively) or to read words into the legislation. The question of whether section 3 can be applied does not depend on whether it is possible to solve the problem by a simple linguistic device.
- Lord Nicholls also makes it clear that there is no need to find that the statutory language should be ambiguous before interpreting the legislation so as to be compatible with Convention rights. He does not deal expressly with the possibility of Parliament making express provision in contravention of Convention rights. Mr Lasok refers to such a possibility in the context of legislation designed to implement Community legislation in his argument before us (para 60, above). So he submits that Parliament might use language which made it clear that it did not intend VAT to be imposed in a situation in which it was chargeable under the Sixth Directive. The situation which he postulates is not one in which Parliament has specifically stated that it is legislating in a manner which departs from the Sixth Directive. In the situation postulated, as it seems to me, the court's interpretative duty, whether arising under Community law or arising under section 3, is not excluded. In determining whether the solution is one of interpretation or impermissible law-making, the relevant test remains whether the interpretation that would be required to make the statute in question Convention-compliant or in this case, EU law-compliant, would involve a departure from a fundamental feature of the legislation. As I see it, the latter cannot be the case where the effect of the interpretation would be to bring the statute into conformity with the objectives of the Sixth Directive in the absence of clear statutory language to the effect that Parliament intended that there should not be such conformity.
- It is, however, an open question whether when interpreting legislation as far as possible in the light of the wording and purpose of a directive the English courts can go as far as envisaged in the Pfeiffer case and interpret other rules of domestic law in conformity with the interpretation adopted under the Marleasing principle. It may also be that, if there is a choice of method or result in interpreting an enactment to conform to the underlying European Union legislation, the court should adopt that which involves least change from the domestic legislation given its normal meaning. However these questions do not need to be considered on this appeal.
- Although the technique of interpreting domestic legislation as far as possible in conformity with European Union law has now been applied (with necessary alterations) to test whether the legislation is compatible with the ECHR, I recognise that the context is different in some respects. The obligation to comply with the Convention is imposed on the member state. The Convention does not bind the courts of a member state. But the actions of the courts can place the member state in breach of its obligations under international law. Furthermore, the Human Rights Act 1998 provides the court with an alternative solution, namely that of making a declaration of incompatibility (Human Rights Act 1998, section 4). This alternative was inserted in the interests of preserving Parliamentary sovereignty. No such alternative is available for domestic legislation implementing European Union legislation. I doubt however whether much turns on this point. Section 3 imposes an obligation to interpret legislation compatibly with Convention rights, not a discretion to do so. Accordingly, I consider that the differences in concept between section 3 interpretation and interpretation under the Marleasing principle are more apparent than real. As already stated I consider that the Ghaidan case is a helpful guide when determining the interpretation under the Marleasing principle. I see no reason why the same robust techniques used to make legislation compatible with the ECHR should not equally apply to make domestic legislation comply with the laws of the European Union.
- I now turn to the issues set out in paragraph 27 above.
(i) Are the avoidance of non-taxation, the avoidance of double taxation and the prevention of the distortion of competition general principles of the Sixth Directive?
- I repeat my explanation above (para 28) as to the meaning of these principles in this case. There is an obvious relationship between the principle that the distortion of competition should be prevented and the principle of neutrality which it is often said is a feature of the VAT system that economic activities are subjected to VAT in a neutral way, that is without reference to their purpose or results.
- In my judgment the principles of avoidance of non-taxation, avoidance of double taxation and the prevention of the distortion of competition are general principles of the Sixth Directive. One of the objectives of the Directive is the harmonisation of rules on turnover taxes (see the preamble quoted above) 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. Likewise it must follow that, in the absence of an express provision for double taxation, it is not an objective of the Directive to impose double taxation. As to the non-distortion of competition, this is referred to in the preamble of the directive cited above as well as in the Carpaneto case to which Mr Pleming refers. There is thus clear authority for the proposition that VAT should not operate in a way that distorts competition. I am content also to adopt the other reasons which Mr Pleming gives in his submissions summarised in paras 29 to 33 above in support of the principles of avoidance of non-taxation, avoidance of double taxation and the prevention of distortion of competition.
- Article 9(3) starts with the words "In order to avoid double taxation, non-taxation or the distortion of competition...". Article 9(3) has no application in this case because it deals with supplies effectively enjoyed in a territory other than that in which the supply is deemed to take place. I do not consider that the presence of the words at the start of article 9(3) detract from the conclusion expressed above. Indeed they confirm it. This view receives some support from the decision of the Court of Justice in the Berkholz case and cited by Advocate General in his opinion in the RAL case, where he said:
"37. The correlation between these two connecting factors which, according to the literal tenor of Article 9(1), seem to operate in a purely alternative way, has been clearly established in the case law of the Court. After stating that the general purpose of Article 9 is 'to avoid, first, conflicts of jurisdiction, which may result in double taxation, and, secondly, non-taxation, as Article 9(3) indicates, albeit only as regards specific situations'. (Bergholz)" (8)
(ii) If the answer to the first question is yes, and leaving on one side the possible impact of the place of supply rules, are any of those principles violated by the conclusion that the supplies by the UK distributors of phonecards in this case are not subject to VAT?
- This issue raises the point made by Mr Lasok in reliance on the Ideal Tourisme case and the decision of this court in F & I Services. I have summarised the facts of the Ideal Tourisme case and Mr Lasok's submission in para 41 above. The passage from the judgment of the Court of Justice on which Mr Lasok relies is as follows:
"37. However, the Community system of VAT is the result of a gradual harmonisation of national laws in the context of Articles 99 and 100 of the EC Treaty (now Articles 93 EC and 94 EC). As the Court has repeatedly stated, this harmonisation, as brought about by successive directives and in particular by the Sixth Directive, is still only partial (see Case C-165/88 ORO Amsterdam Beheer and Concerto v Inspecteur der Omzetbelasting  ECR 4081, paragraph 21).
38. As the Belgium State stated at the hearing, the harmonisation envisaged has not yet been achieved, in so far as the Sixth Directive, by virtue of Article 28(3)(b), unreservedly authorises the Member States to retain certain provisions of their national legislation predating the Sixth Directive which would, without that authorisation, be incompatible with that directive. Consequently, in so far as a Member State retains such provisions, it does not transpose the Sixth Directive and thus does not infringe either that directive or the general Community principles which Member States must, according to Klensch, comply with when implementing Community legislation."
- That leaves the question whether the rule to which Customs & Excise contends that the principles apply is or is not a harmonised rule of the Sixth Directive. If the rule is one relating to credit vouchers then it is not a harmonised rule for the reasons given above. In F & I Services, a case concerning face value vouchers but with no cross-border element, this court observed that there was no "obvious" source in the Sixth Directive for a statutory predecessor of para 3 of schedule 10A: it is to be noted that this court did not say that there was no source at all for para 3 in the Sixth Directive.
- In my judgment Mr Pleming is correct in his submission that the present case is not about the application of the principles of avoidance of non-taxation and of the prevention of the distortion of competition to the issue of credit vouchers. The provisions relating to credit vouchers contain provisions in paras 3(2) and 3(3) designed to avoid double taxation and non-taxation respectively. However the vouchers are essentially promises to supply services and the provisions of the Sixth Directive apply to that supply. The Sixth Directive treats the supply of telecommunications services as a supply subject to VAT. The principles of the Sixth Directive apply to that supply as much as to any other supply which is taxable under that Directive. Therefore if neither the issue of phonecards for Interdirect's telecommunications services nor the supply of those services to persons within the Community is subject to VAT the principle of the avoidance of non-taxation is necessarily infringed.
- Likewise, in that case, the principle that VAT law should not distort competition applies and it is on the facts infringed because Interdirect and its distributors are able to market Interdirect's telecommunications services without having to account for VAT. This gives them a competitive advantage over other suppliers of such services and phonecards.
- The principle of double taxation would also be infringed if Ireland were to impose VAT on the supply of phonecards by ICSIL to United Kingdom traders but this does not happen. Indeed neither party to this appeal suggests that Irish law is not in conformity with the Sixth Directive.
(iii) If the answer to the second question is yes, are those principles excluded by the place of supply rules in this case?
- I should state here that Customs & Excise's case is that the supply of cards to traders in the United Kingdom should be subject to VAT in the United Kingdom in conformity with the place of business rules in article 9(2)(e) of the Sixth Directive. At certain points in his judgment, the judge used language which can be read as suggesting that the case of Customs & Excise is that Interdirect should be liable to account for VAT in the United Kingdom on supplies in Ireland to end-users of telecommunications services in the United Kingdom. These supplies would be within article 9(1) of the Sixth Directive if they were taxable supplies but in fact Ireland (as it is entitled to do under Community law) treats the supply as the issue of the phonecard and that supply is not subject to VAT because it is to a trader (to whom article 9(2)(e) applies).
- The answer to this question turns on which is the relevant supply. It follows from the last paragraph that the relevant supply is that to the UK traders, not that by Interdirect to the end-users.
- The Sixth Directive provides rules for determining the place of supply of goods and services. The rules applicable to the supply of services are contained in article 9, set out in para 22 above.
- Article 9(1) sets out the rules which apply to cases other than those for which there are the specific rules set out in article 9(2). Under article 9(2) the place of supply for telecommunications services is the place where the customer is established if he is established outside the Community or is a taxable person within the Community. This no doubt facilitates the recovery of VAT by taxable persons.
- The place of supply rules in the Sixth Directive are exclusive. In the RAL case, the Court of Justice held:
"23. Article 9 of the Sixth Directive contains rules for determining the place where services are deemed to be supplied for tax purposes. Whereas Article 9(1) lays down a general rule on the matter, Article 9(2) sets out a number of specific instances of places where certain services are deemed to be supplied. The object of those provisions is to avoid first, conflicts of jurisdiction which may result in double taxation, and, secondly, non-taxation (see Case 168/84 Berkholz  ER 2251, paragraph 14, Case C-327/94 Dudda  ECR 1-4595, paragraph 20, and Case C-167/95 Linthorst, Pouwels en Scheres  ECR 1-1195, paragraph 10).
In respect of the relationship between the first two subparagraphs of Article 9 of the Sixth Directive the Court has already held that Article 9(1) in no way takes precedence over Article 9(2). In every situation, the question which arises is whether it is covered by one of the instances mentioned in Article 9(2); if not, it falls within the scope of Article 9(1) (Dudda, cited above, paragraph 21, and Linthorst, Pouwels en Scheres, cited above, paragraph 11)."
- Accordingly, the place of supply rules in article 9(2) take precedence over the general rule in article 9(1). Article 9(1) is the residual category. In this case, the issue of a phone card (to the extent subsequently used for telecommunications services) is no more than a promise to make such services available or to procure that such services are made available and therefore constitutes a supply of telecommunications services within article 9(2)(e). Therefore the issue of phonecards to UK traders is subject to VAT here and accordingly I take the view that the judge erred in coming to the conclusion that the general principles of VAT law (as to avoidance of non-taxation, avoidance of double taxation and the prevention of the distortion of competition) had no application in this case.
(iv) If the answer to the third question is no, should national implementing legislation be construed so far as it can in accordance with those principles?
- I have already discussed the ambit of the Marleasing principle above. The obligations on national courts to interpret domestic legislation so far as possible in the light of the wording and purpose of Community legislation flows from the United Kingdom's membership of the European Union. It is to be observed that the Court of Justice in the Marleasing case referred explicitly to the purpose of the directive and not just its express provisions and this accords with the suggestion made above that the objectives of a Community measure play a greater role in its interpretation than objectives of a particular statute would do in the interpretation of a purely domestic statute. I do not accept the submission of Mr Lasok that the principles identified above are in some way "weak" principles which should receive less weight under the Marleasing principle than substantive provisions, or that they should only apply where directly effective provisions of the Sixth Directive are in issue. I do not consider that Mr Lasok has shown any basis in the case law of the Court of Justice for this distinction.
- Once it is determined that the court has a wide power to interpret legislation in the light of the wording and purpose of the Sixth Directive, there can be seen to be no objection in principle to interpreting schedule 10A to conform to the principles of the Sixth Directive. The principal remaining objection to the application of the Marleasing principle in this case is the principle of legal certainty. This is an important issue.
- I accept that under the principle of legal certainty the person affected by legislation must be able to foresee the manner in which it is to be applied and I would also accept that must particularly be so where the legislation has financial consequences for him such as flow from the imposition of the requirement to account for VAT. A taxpayer has a legitimate expectation that this principle will be observed. Moreover, a taxpayer is entitled to structure his business so as to limit his liability to tax and to take advantage of any loopholes that he can find. These principles can be found in the judgment of the Court of Justice in Gemeente Leusden v Staatsecratis van Financien, C-487/01 and C-07/02  STC 508. However, in the present case, it is well-known that the provisions of VATA 1994 have to be interpreted in conformity with the Sixth Directive and that the supply of telecommunications services constitutes a taxable supply for the purposes of the Sixth Directive. I therefore agree with the judge that the principle of legal certainty is not infringed in this case.
- In addition it is not an objection to the application of the Marleasing principle that it may result in the imposition of a civil liability where such a liability would not otherwise have been imposed under domestic law: see for example Centrosteel Srl v Adipol GmbH, where the effect of interpreting Italian law in accordance with the directive on commercial agents was that a contract made by an agent who was not registered in accordance with the purely domestic provisions of Italian law was enforceable and not void. This point was specifically made by Advocate General Jacobs in para 35 of his opinion. The Court of Justice reached the same conclusion although it did not advert to this point. However it distinguished the application of the Marleasing principle from the general principle that a directive cannot (viz without domestic implementation) impose obligations on an individual (judgment, para 15).
(v) If the answer to the last question is yes, can paragraph 3(3) of schedule 10A be interpreted so as to be compatible with those principles and, if so, is the effect that the disregard in paragraph 3(2) is inapplicable where the supply of telecommunications by Interdirect is not liable to VAT under Irish law?
- It follows from the fact that if ICSIL is correct in its interpretation of para 3(3) of schedule 10A, the VAT treatment of the distribution of the phonecards for Interdirect's services infringes the principles of the Sixth Directive. It further follows that the United Kingdom is acting in a way which is incompatible with its Community obligations if the effect of para 3 of schedule 10A is to relieve any supplier from VAT under the guise of granting relief to a supplier from the double taxation on telecommunications services. Therefore the court is under an obligation to interpret para 3 as far as possible in the light of the wording and purpose of the Sixth Directive and specifically to prevent the non-taxation of the supplies to the UK distributors of ICSIL's phonecards, or other taxpayers in the same position.
- This is not beyond the bounds of permissible interpretation because there is no indication that Parliament specifically intended to depart from the Sixth Directive in this respect. The provisions of schedule 10A are equally consistent with Parliament not having foreseen the particular problem that has arisen in this case. It follows from the Ghaidan case that the court's duty arises even if Mr Lasok is correct in submitting that the correct interpretation of schedule 10A is that VAT is not imposed on the UK distributors of ICSIL's phonecards in the circumstances of this case. It also arises even if Parliament did not intend to limit relief in the way for which Customs & Excise now contend. The provisions of schedule 10A do not contain any fundamental feature inconsistent with reading into paragraph 3(3) a further disapplication of the disregard in paragraph 3(2) to make paragraph 3 conform to the objectives of the Sixth Directive: it is simply a case of widening the existing provision in paragraph 3(3). Indeed the existing provision is directed to a not dissimilar situation, that is where VAT which is due is not accounted for. Moreover, this is not a case, in my judgment, where it is not possible for the court to interpret para 3(3) of schedule 10A "so far as possible" in conformity with European Union law because the provision, as so interpreted, would raise policy issues as to its effect which the court cannot, in performance of its role, resolve. Such issues might arise for instance (to take a very different case) if the interpretation of a statute in conformity with a European Union directive required the court to limit a provision of domestic law which had been inserted to protect third parties, such as creditors or consumers, and some equivalent protection would have to be provided. In those circumstances, the task of interpretation might go beyond the judicial role of interpretation, subject to the issue arising from the Pfeiffer case left open in para 80 above. However, the interpretation in the present case does not raise any such consequential issues. Any consequential issues which it raises are inherent in the provision as it stands.
- Mr Pleming ventured only briefly to submit precisely how para 3 should be interpreted in order to bring it into conformity with Community law. As the Ghaidan case shows it is not necessary to find a simple linguistic device for this. It also shows that one of the ways of interpreting a provision "so far as possible" is to write in words. In my judgment the appropriate interpretation is to read in words to widen the disapplication in para 3(3) of the disregard in para 3(2) so that the disapplication applies where the disregard would result in the non-taxation, contrary to the objectives of the Sixth Directive specified in paragraph 95 above, of a taxable supply of goods or services in the United Kingdom. In my judgment it is unnecessary for this court to attempt to splice precise words into the language used by Parliament in schedule 10A as if it were itself the Parliamentary drafter. As the Ghaidan case shows, it is not an objection to interpretation of this nature that it amends the language used by Parliament. In this respect, I do not find Mr Lasok's citation from the Scotch Whisky case of assistance since the principle there stated was one applicable to the interpretation of European Union legislation (i.e. under the first level of interpretation as I have described above) and not applicable to the interpretation of domestic legislation under the Marleasing principle. The interpretation of para 3(3) of schedule 10A which I prefer gives effect to the wording and purpose of the Sixth Directive because it implements the general principles of VAT law identified above in respect of the harmonised rule relating to the place of supply of telecommunications services, i.e. that such supply should in the case of private consumers be taxed in Ireland but in the case of registered persons such as the United Kingdom distributors be taxed in the place where such persons are established.
- Mr Lasok submits that paragraph 3 operates in a draconian way because it operates where the ultimate supplier fails to account for VAT due on the supply for any reason whatsoever, and indeed also if the country in which the ultimate supply takes place fails to tax the supply when it ought to do so, or to enforce its taxing provisions. In my judgment it is not necessary to decide on this appeal whether this goes further than is required by the Sixth Directive principle of avoidance of non-taxation, and indeed there has been no argument on the precise ambit of the principle. (On this question, it may be necessary to consider the recent decision of the Court of Justice in Optigen v Customs & Excise C-354/03, 12 January 2006, which was delivered after the hearing of this appeal.) It seems to me that, in practice, where the ultimate supplier has a liability for VAT, UK traders will in a number of cases be able to minimise any risk to themselves from the non-payment of VAT by the ultimate supplier (for example) by taking covenants from the ultimate supplier or some other person that it will account for VAT and that accordingly this is not as a commercial matter as unfair to such traders as it may seem.
- There is also a difficulty inherent in paragraph 3(3) of schedule 10A in that the trader may not know the extent of the non-payment of VAT by the person redeeming the voucher. In this case, however, the non-payment can be anticipated, and no doubt in view of the connection between the parties the information as to the amount of the supplies by Interdirect can be obtained.
- Since preparing this judgment, I have had the benefit of reading, in draft, the judgment of Pill LJ and, save as appears above, I agree with the substance of his reasoning.
- For the reasons given above, I would allow the appeal and dismiss the respondent's notice. If the other members of the court agree with me on the disposition of this appeal, it will be unnecessary to consider the application by Customs & Excise for a reference to the Court of Justice for a preliminary ruling in this case.
Lord Justice Latham:
- I agree.
Lord Justice Pill:
- Paragraph 3 of Schedule 10A of the Value Added Tax Act 1994 is set out by Arden LJ in paragraph 12 of her judgement. In short, in terms of liability for VAT, paragraph 3(2) provides a 'disregard' and paragraph 3(3) a disapplication of that disregard.
- Having considered the possibility that on an application of the Schedule the supply of telecommunications services may escape VAT altogether, Moses J, at paragraph 19 of his judgment, stated succinctly how that possibility has arisen in the present case:
"It is apparent that this consequence flows from a difference in treatment of phone cards between the Irish and United Kingdom legislation. Ireland imposes VAT on the supply of the phone cards and avoids double taxation by providing that no further VAT is due when access to the telecommunication services is obtained. The United Kingdom imposes VAT not on the supply of the card but on the supply of the service when the card is redeemed. "
- Phone cards are supplied by an Irish company to distribute in the United Kingdom. Under Article 9 of the Sixth European Union ("EU") VAT Directive (77/338/EC) (the "Sixth Directive") (and under Irish law) that is a supply in the United Kingdom. ICSIL, the Irish company, are a party to these proceedings as applicants for judicial review and not as an entity from which Customs & Excise seek to collect VAT. The cards are sold in the United Kingdom and used to obtain telecommunications services supplied in Ireland by another Irish company, Interdirect.
- The Irish Revenue expected VAT to be charged in the United Kingdom, where the service was supplied. In their VAT information sheet 08/03, of June 2003, UK Customs & Excise stated:
"Consideration for any supply of a credit voucher is disregarded except to the extent that it exceeds the face value of the voucher. The redeemer of the voucher only accounts for VAT at the time the voucher is redeemed for goods or services."
That reflects paragraph 3(2) of Schedule 10A. It is common ground that the relevant phone cards are 'credit vouchers' within the meaning of the Schedule.
- Reference was also made in the information sheet to the then new provision in paragraph 3(3) of the Schedule which allowed the collection of VAT due from the person who first sold the voucher, the issuer, in the event that the redeemer of the voucher failed to account for any VAT due. It was stated that the provision would be used only in limited circumstances. However, the stance of Customs & Excise had stiffened by December 2003 when Business Brief 29/2003 was issued. It was then not accepted that there were any circumstances in which telecommunication services consumed within the EU could be VAT free. Consideration for the supply of a credit voucher in the form of a phone card is not to be disregarded in circumstances where no VAT will be accounted for on the subsequent supply of telecommunication services.
- The information sheets do not of course have legal effect and I refer to them only to illustrate the practical problem which has arisen. It is common ground that the Sixth Directive permits VAT for telecommunications services to be collected either in the way provided by the law of the United Kingdom or in the way provided by the law of the Republic of Ireland. Both are agreed to be fair and reasonable methods. It cannot be said that the Sixth Directive requires that the VAT is to be levied on suppliers or distributors of credit vouchers. To tax both the supplier of the credit voucher and the supplier of the telecommunications service would create the mischief of double taxation. There is a mismatch between the two methods, an absence of harmonisation, which, in the view of the judge, permitted an obligation to pay VAT to be escaped in the case of this cross-border transaction.
- I see considerable force in the submissions of Mr Lasok QC, for the respondent, seeking to uphold the decision of the judge. How VAT is to be collected is a domestic law issue. The wording of paragraph 3 of Schedule 10A is clear and so is the policy behind it. The Sixth Directive did not require the VAT to be imposed on the supply of the phone card and Parliament deliberately took the course of taxing at the point the telecommunications services were provided. That being so, the plain words of the paragraph, it is submitted, should not so be construed or altered as to permit collection on the supply of the card. The judge concluded, at paragraph 52:
"There is nothing within the Sixth Directive which confers a power, let alone imposes an obligation on the United Kingdom to charge tax on Indirect's [an Irish company] supply of telecommunication to an end-user."
- Mr Pleming QC, for Customs & Excise, submits, correctly in my view, that the judge was in error in finding that Customs and Excise were seeking to charge tax on supply to an end-user. They are seeking to charge distributors in the United Kingdom to whom potentially taxable supplies had been made. That point does not, however, resolve the basic issue in the case, the application of paragraph 3 of Schedule 10A.
- The conditions which have to be satisfied before paragraph 3(3) can apply, including "that there is VAT due", are not satisfied, it is submitted by Mr Lasok. Under United Kingdom legislation, VAT is not due from the distributors. In paragraph 3(3) "VAT due" must mean "VAT due under United Kingdom legislation", and cannot mean VAT intended to be due under the Sixth Directive or VAT which cannot be recovered from the supplier of telecommunications services because they are supplied in a different jurisdiction.
- I agree with Arden LJ, at paragraph 106, that, under Article 9(2)(e) of the Sixth Directive, the place of supply of the phone cards is the United Kingdom, when they are sold to UK registered distributors. That is recognised in Irish law. The place of supply of the telecommunications service is the Republic of Ireland, the supplier being an Irish company.
- Mr Pleming, submits that it is an essential part of his case that VAT has not been charged in Ireland. That being so, and to perform its obligations under the Sixth Directive, Customs & Excise can and must collect VAT on the supply of the cards in the United Kingdom. There is a potentially taxable supply in the United Kingdom when the card is supplied to a distributor in the United Kingdom and, since the actual telecommunications service is supplied from Ireland to the end-user who redeems the card, and that supply cannot be taxed in the United Kingdom and will not be taxed in Ireland, the supply in the United Kingdom must be taxed to prevent the entire chain of supply being tax-free.
- The problem arises because of the lack of harmonisation between United Kingdom law and that of the Republic of Ireland in this situation. The court has not been supplied with information upon the law of other EU Member States in this respect; whether divergence in approach occurs and, if so, how cross-border transactions are dealt with when there is a divergence in the method of imposition of VAT. There is no evidence, for example, as to how other states, if any, which adopt the United Kingdom method of collection react to a situation in which tax has already been charged in a state adopting the Irish method. There is considerable scope for mismatch.
- On behalf of the respondents it is submitted that paragraph 3(3) of Schedule 10A is draconian in nature in that it permits VAT to be recovered from suppliers of credit vouchers in the United Kingdom even though they may know nothing about the non-payment of the VAT by the persons supplying the telecommunications service. It is submitted that it should be given a narrow construction. It is clear that the intention of paragraph 3 is to impose VAT on the supply of the telecommunications service and not on supply of the credit voucher. Sub-paragraph (3) is intended to disapply the disregard in sub-paragraph (2) for the purposes of the act of the supply of credit vouchers only in narrowly defined circumstances. While its purpose is to prevent the entire chain of supply being complete without an imposition of VAT, it does so only in narrowly defined circumstances, it is submitted.
- There are ways in which words can be read into paragraph 3(3) which would cover the present situation, though Mr Pleming was reluctant to opt for a precise formula. I acknowledge that to disapply the disregard in favour of Customs & Excise in this case would be to apply the disapplication, in the form it is drafted, for a different purpose from that for which it was drafted. In that sense, it does go against the grain of provisions which are based on the principle that VAT is to be levied on the supplier of telecommunications services rather than the supply of the credit vouchers. The presence of paragraph 3(3) does, however, at least demonstrate that the disregard in paragraph 3(2) is not to be universal and that there are intended to be situations, if the result would otherwise be to permit escape from VAT, in which the disregard does not apply.
- It appears that the draftsman have not contemplated the possibility that member states may, as they both fairly and reasonably can, impose VAT at different stages in the supply chain. The consequences of different treatment in the United Kingdom and the Republic of Ireland can, in the respondents' submission, be closed only by amending legislation.
- What Customs and Excise's submissions require is a finding that, notwithstanding the wording of paragraph 3 of Schedule 10A, and of the decision to impose the VAT on the supplier of the telecommunications service which led to that wording, the paragraph should be read so as to permit the collection of the tax from distributors in the United Kingdom in present circumstances.
- The preamble to the Sixth Directive stresses the need for harmonisation as between Member States in the collection of VAT. Article 2 makes clear that "the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such" … "shall be subject to VAT." Article 9, under the general title "Place of Taxable Transactions", stipulates the place where a service is supplied. Article 9(3) makes provision for particular situations, which do not include the present one, "in order to avoid double taxation, non-taxation or the distortion of competition". That reaffirms the importance of those principles in this context.
- Having analysed the situation in that way, I have come to the conclusion, not without hesitation, that the appeal should be allowed and substantially for the reasons given by Arden LJ. Disapplication of the disregard of consideration for supply of a credit voucher provided by paragraph 3(2) is permitted on the present facts. Read together, paragraphs 3(2) and 3(3) are subject to the underlying principle, arising from the Sixth Directive, that the supply of services shall be subject to VAT.
- Cross-border transactions involving entities in Member States of the EU are likely to be very frequent and the provision of services, such as telecommunications services, across borders, is likely to be an important component of EU trading. To permit it to be conducted free from VAT could create a major gap in the requirement in EU law to impose the tax.
- Measures taken by Member States pursuant to their obligation to tax the supply of services must accordingly be read subject to that obligation and subject to the principle that both non-taxation and double taxation are to be avoided. Unless and until the methods adopted by Member States to perform the obligation are harmonised, a legislative provision designed to enforce the obligation, such as paragraph 3 of Schedule 10A, should be read so as to prevent, in the case of cross-border transactions, escape from VAT. Only if that is done can the other principle involved and explained by Arden LJ, the prevention of distortion of competition, be satisfied.
- Unless domestic provisions in Member States are read subject to the underlying principle that non-taxation is not to be permitted, disharmony resulting from different methods of collection is likely to have significant consequences. They can be avoided if a proviso may be read into measures such as paragraph 3 of Schedule 10A that they are not to be applied in a way which would lead to non-taxation or double taxation. While reading such measures other than literally in a sense may create uncertainty, knowledge that such measures will be read so as to prevent non-taxation works in favour of the principle of certainty. There will be certainty that VAT on services cannot be escaped by arranging the transactions cross borders.
- Arden LJ has cited the appropriate authorities. I have found the judgment of the European Court of Justice in Pfeiffer v Deutsches Rotes Kreuz ...Cases C-397/01 to C-403/01), cited in paragraph 80 of Arden LJ's judgment, helpful and relevant. I have also found the guidance given by the House of Lords in Ghaidan v Godin-Mendoza  2 AC 557 valuable on the present issue. While it was a case under Section 3 of the Human Rights Act 1998, and not one on EU jurisprudence, I accept the reasoning of Arden LJ, at paragraph 91, that robust techniques may also be used to make domestic legislation complicit with the laws of the EU.
- In addition to the passages in the speeches in Ghaidan cited by Arden LJ, I would rely, as transposed from a Section 3 context to the context of EU law, on paragraph 121 in the speech of Lord Rodger of Earlsferry:
"121. For present purpose, it is sufficient to notice that cases such as Pickstone v Freemans plc  AC 66 and Lister v Forth Dry Dock & Engineering Co Ltd  1 AC 546 suggest that, in terms of section 3(1) of the 1998 Act, it is possible for the courts to supply by implication words that are appropriate to ensure that legislation is read in a way which is compatible with Convention rights. When the court spells out the words that are to be implied, it may look as if it is "amending" the legislation, but that is not the case. If the court implies words that are consistent with the scheme of the legislation but necessary to make it compatible with Convention rights, it is simply performing the duty which Parliament has imposed on it and on others. It is reading the legislation in a way that draws out the full implications of its terms and of the Convention rights. And, by its very nature, an implication will go with the grain of the legislation. By contrast, using a Convention right to read in words that are inconsistent with the scheme of the legislation or with its essential principles as disclosed by its provisions does not involve any form of interpretation, by implication or otherwise. It falls on the wrong side of the boundary between interpretation and amendment of the statute."
The "scheme of the legislation" in the present context includes the fundamental duty arising from EU Directives to impose VAT on the supply of services.
- I refer also to the approach of Lord Nicholls of Birkenhead at paragraph 33 of his speech, cited by Arden LJ at paragraph 85. The court has an "extended interpretive function" in this context. Far from the construction of paragraph 3 proposed being inconsistent with "a fundamental feature of legislation", it applies the fundamental principles of EU law as found in the EU Directives. The construction "goes with the grain" of those instruments. To make it compatible with EU law, paragraph 3 of Schedule 10A must be read subject to a proviso that supplies of services are not to escape VAT by reason of the fact that cross-border transactions are involved.
- I am conscious that the approach proposed by Arden LJ, with which I agree, involves the use of "robust techniques" but in my judgment they are justified in the particular circumstances of this case, to which I would confine my comments. I also agree that the appeal should be allowed.