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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Arachchige v Revenue and Customs [2010] EWCA Civ 1255 (08 November 2010) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2010/1255.html Cite as: [2011] STC 33, [2010] EWCA Civ 1255, [2010] BVC 1046, [2010] STI 2923 |
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE LEWISON
CH2008APP0505
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE ETHERTON
and
LORD JUSTICE SULLIVAN
____________________
Prince Karunaraina Samarappuli Arachchige |
Appellant |
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- and - |
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The Commissioners for Her Majesty's Revenue and Customs |
Respondent |
____________________
Mr Nigel Pleming QC, Mr George Peretz and Miss Fiona Banks (instructed by Customs & Excise (Manchester)) for the Respondent
Hearing dates : 14th October 2010
____________________
Crown Copyright ©
LORD JUSTICE ETHERTON :
Introduction
Factual background
The EU legislation
"(1) The place where a service is supplied shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides.
(2) However:
…
(e) the place where the following services are supplied when performed for customers established outside the Community or for taxable persons established in the Community but not in the same country as the supplier, shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied or, in the absence of such a place, the place where he has his permanent address or usually resides:
…
Telecommunications. Telecommunications services shall be deemed to be services relating to the transmission, emission or reception of signals, writing, images and sounds or information of any nature by wire, radio, optical or other electromagnetic systems, including the related transfer or assignment of the right to use capacity for such transmission, emission or reception. Telecommunications services within the meaning of this provision shall also include provision of access to global information networks.
…
3. In order to avoid double taxation, non-taxation or the distortion of competition the Member States may, with regard to the supply of services referred to in 2 (e) and the hiring out of movable tangible property consider:
(a) the place of supply of services, which under this Article would be situated within the territory of the country, as being situated outside the Community where the effective use and enjoyment of the services take place outside the Community;
(b) the place of supply of services, which under this Article would be situated outside the Community, as being within the territory of the country where the effective use and enjoyment of the services take place within the territory of the country."
The UK legislation
"(10) A supply of services shall be treated as made—
(a) in the United Kingdom if the supplier belongs in the United Kingdom; and
(b) in another country (and not in the United Kingdom) if the supplier belongs in that other country.
(11) The Treasury may by order provide, in relation to goods or services generally or to particular goods or services specified in the order, for varying the rules for determining where a supply of goods or services is made."
"(1) In this Schedule "face-value voucher" means a token, stamp or voucher (whether in physical or electronic form) that represents a right to receive goods or services to the value of an amount stated on it or recorded in it."
"2. The issue of a face-value voucher, or any subsequent supply of it, is a supply of services for the purposes of this Act."
"21. (1) The place of supply of a right to services shall be the same as the place of supply of the services to which the right relates (whether or not the right is exercised).
(2) The reference to a right to services in paragraph (1) shall include a reference to any right, option or priority with respect to the supply of services and to the supply of an interest deriving from any right to services."
"The place of supply of a right to services shall be the same as the place in which the supply of the services to which the right relates would be treated as made if made by the supplier of the right to the recipient of the right (whether or not the right is exercised)."
The Tribunal's decision
"76. It seems clear to us that the [pre 1 August 2006] version did not intend an additional assumption to be made that the supplier of the right was also making the supply of the service. There will be many cases where the supplier of the right does not or cannot make the supply of the services. The plain intention of [that] version is that one looks to the provision of the services and asks whence will that take place. The rule is specific and clear: it does not affect the nature of the supply of the right but merely the place of supply and aligns that place with the place of supply of the services to be obtained.
77. ...
78. We have noted the tacit assumption that the phone cards represented a 'right' to a supply of phone services. As a result the place of supply of the phone cards is determined by Article 21. The place of supply of Mr Arachchige's services in providing the phone card was not therefore the place which these services would have been provided if they had been provided by Mr Arachchige to the buyer of the phone card, but instead the place of supply of the telecommunications services obtained by the buyer – or obtainable by the buyer from the use of the card.
79. Thus, subject to other provisions of SI 1992/3121, if the telecommunication service supplier belonged in the UK the place of supply of the telecoms service (and therefore of the phone card) would (by section 7(10) VATA) be treated as being in the UK and otherwise would be treated as supplied outside the UK."
"86 … In either case [that is, whether the cards supplied by the Appellant were credit vouchers or retailer vouchers] a non-UK but EU supplier of the telecoms service will mean that the supply of the card is not VATable because it will not be a supply made in the UK."
"27. 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?"
"112. 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."
"114. Mr Pleming [counsel for HMRC] 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. … 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."
"101. … we find that, for the purposes of the Directive, the vouchers supplied by Mr Arachchige are to be treated as supplied in the UK by him in conformity with Article 9(1).
102. If that is right then … Article 21(1) appears to conflict with the Directive. We must interpret domestic legislation so far as possible in the light of the wording and purpose of the directive in order to achieve the result pursued by the Directive (Arden LJ in IDT paragraph 79). That might require departing from the unambiguous meaning of Article 21(1) (paragraph 86 IDT) but not so as to produce a meaning which departs substantially from a fundamental feature or cardinal principle of the legislation or where there would be important practical repercussions which the courts are not equipped to evaluate (paragraph 87). The interpretation chosen must go with the grain of the domestic legislation.
103. We do not find this an easy task. We see nothing in the setting of Article 21 or of the place of supply provisions generally in the UK domestic legislation which indicates any general policy. Article 21 appears to stand on its own. Thus any grain or cardinal features must be derived from its provisions. Those words are clear: the place of supply of the right is the place of supply of the services to which the right relates. Given that clarity of expression it does not seem proper or possible to read into those words additional words which would give a different place."
"136 …. (7) The effect of paragraph 21(1) SI 1992/3121 as it applied before 1 August 2006 (and therefore as it applied to the periods under appeal) was that the supply of the card should be treated as taking place where the supply of the telecoms services obtainable by the use of the card took place. Because the purchasers of the cards belonged in the UK, but were not acquiring the cards for the purposes of a business carried on by them, the supply of the card is to be treated as having taken place in the UK unless the supplier of the telecoms service belonged in the EU, when it would have taken place in the supplier's Member State."
The judgment of Lewison J
"i) Turnover tax across the EU is intended to be a coherent system; and the coherence can be maintained provided that, if tax is not paid on the issue of a voucher in one member state it is paid on the supply of the voucher or the services for which it is redeemed in another member state (§ 4);
ii) If the phone cards issued by IDT had been retailer vouchers there would have been no question but that the supply in the United Kingdom by distributors to members of the public would have attracted VAT (§ 13);
iii) The principles of avoidance of non-taxation, avoidance of double taxation and the prevention of the distortion of competition are general principles of the Sixth Directive (§ 95). Arden LJ expanded on this:
"One of the objectives of the directive is the harmonisation of rules on turnover taxes … and the Directive contains mandatory rules as to which supplies shall be taxable and where those supplies are deemed to take place. It must follow from these provisions that one of the objectives of the Directive is to prevent situations arising in which a taxable supply escapes taxation because it is not caught by the legislation of member states. I therefore reject Mr Lasok's submission that VAT is simply a territorial tax and if one member state fails to impose VAT that cannot result in the imposition of VAT by another member state: as I see it, it is a necessary corollary of the principle of non-taxation, as this case shows, that this can occur."
iv) If neither the issue of phone cards for Interdirect's telecoms services nor the supply of those services to persons within the EU is subject to VAT the principle of avoidance of non-taxation is infringed (§ 99);
v) This conclusion is not altered by the place of supply rules (§§ 102-107);
vi) In applying the place of supply rules, the issue of a phone card is no more than a promise to make telecoms services available or to procure that they are made available, and therefore itself constitutes a supply of telecommunications services (§ 107);
vii) When a phone card is issued its place of supply is governed by article 9 (2)(e) (§ 107);
viii) The court has an obligation, so far as possible, to interpret domestic legislation so as to avoid infringing the principle of non-taxation (§ 112)."
"24. As I see it, what this [viz. Article 21(1)] is saying is that A is the same as B, where A is the place of supply of a right to services and B is the place of supply of those services. If A = B, then one can identify A, in which case identification of A will automatically identify B. Or one can identify B, in which case identification of B will automatically identify A."
"26. But in so far as this conclusion [of the Tribunal] deals with cards redeemable with service providers who "belong" in other member states, it infringes the principle of avoidance of non-taxation. Returning to my algebraic paraphrase of article 21 the Tribunal identified B and then equated it with A. As a matter of the language of article 21 (1) of the Place of Supply Order it would have been possible to identify the place of supply of the phone card (A) first and then to have equated that with the place of supply of the telecoms services (B). Since on any ordinary view of the facts the place of supply of the phone cards was the United Kingdom, that would result in the place of supply of the telecoms services also being treated for VAT as being the United Kingdom. That interpretation avoids any infringement of the principle of avoidance of non-taxation…"
"26... Thus as a matter of fact the place of supply of the right to the services was the same as the place of the supply of the services themselves, so that, on the facts, A = B. Both A and B are the United Kingdom."
"30. Where I think that the Tribunal went wrong was that they treated IDT as an "add on" to be considered after they had come to a conclusion about the meaning of article 21. The correct approach, in my judgment, would have been for the Tribunal to have informed itself of the principles explained in IDT before embarking on the process of construction at all. In addition, I do not agree with the Tribunal that article 21 is unambiguous, for the reasons I have tried to explain. Finally, as HMRC rightly submit, the Tribunal's ultimate conclusion is one that infringes the principle of avoidance of non-taxation, and undermines the conclusion of the Court of Appeal in IDT."
The appeal
"31. Consequently, the provision of retail vouchers such as those at issue in the main proceedings does not constitute, for VAT purposes, a supply of goods, but simply the transfer of a future (and as yet indeterminate as to the object) right to goods and/or services. I therefore consider that the provision of such a voucher must be regarded as a supply of services, on account of the fact that, for VAT purposes, each transaction that is not a supply of goods is, necessarily, a supply of services."
Respondents' Notice
"[37] We were referred in the parties' respective written arguments and orally to a number of reported cases on the principles to be observed in looking for a conforming interpretation in either the European Community or Human Rights contexts. In chronological order they are Pickstone v Freemans [1989] AC 66; Marleasing SA v La Comercial Internacional de Alimentacion SA [1990] ECR I-4135; Litster v Forth Dry Dock [1990] AC 546; ICI v Colmer [1999] 1 WLR 2035; Ghaidan v Godin-Mendoza [2004] 2 AC 557; HMRC v IDT Card Services Ireland Ltd [2006] STC 1252; HMRC v EB Central Services Ltd [2008] EWCA Civ 486 and Fleming/Conde Nast v HMRC [2008] 1 WLR 195. The principles which those cases established or illustrated were helpfully summarised by counsel for HMRC in terms from which counsel for V2 did not dissent. Such principles are that:
"In summary, the obligation on the English courts to construe domestic legislation consistently with Community law obligations is both broad and far-reaching. In particular:
(a) It is not constrained by conventional rules of construction (Per Lord Oliver in Pickstone at 126B);
(b) It does not require ambiguity in the legislative language (Per Lord Oliver in Pickstone at 126B; Lord Nicholls in Ghaidan at 32);
(c) It is not an exercise in semantics or linguistics (See Ghaidan per Lord Nicholls at 31 and 35; Lord Steyn at 48-49; Lord Rodger at 110-115);
(d) It permits departure from the strict and literal application of the words which the legislature has elected to use (Per Lord Oliver in Litster at 577A; Lord Nicholls in Ghaidan at 31);
(e) It permits the implication of words necessary to comply with Community law obligations (Per Lord Templeman in Pickstone at 120H-121A; Lord Oliver in Litster at 577A); and
(f) The precise form of the words to be implied does not matter (Per Lord Keith in Pickstone at 112D; Lord Rodger in Ghaidan at para 122; Arden LJ in IDT Card Services at 114)."
[38] Counsel for HMRC went on to point out, again without dissent from counsel for V2, that:
"The only constraints on the broad and far-reaching nature of the interpretative obligation are that:
(a) The meaning should "go with the grain of the legislation" and be "compatible with the underlying thrust of the legislation being construed." (Per Lord Nicholls in Ghaidan at 33; Dyson LJ in EB Central Services at 81) An interpretation should not be adopted which is inconsistent with a fundamental or cardinal feature of the legislation since this would cross the boundary between interpretation and amendment; (See Ghaidan per Lord Nicholls at 33; Lord Rodger at 110-113; Arden LJ in IDT Card Services at 82 and 113) and
(b) The exercise of the interpretative obligation cannot require the courts to make decisions for which they are not equipped or give rise to important practical repercussions which the court is not equipped to evaluate. (See Ghaidan per Lord Nicholls at 33; Lord Rodger at 115; Arden L in IDT Card Services at 113.)"
(1)"The place of supply of a right to services shall (in the case of phone cards) be the same as the place of supply of the services to which the right relates (whether or not that right is exercised),namely the promise to make such services available or to procure that such services are made available."
(2)"The place of supply of a right to services shall be the same as the place of supply of the services to which the right relates (whether or not that right is exercised), had that supply of services been made by the supplier of the right."
Discussion
"26. Consequently, in so far as those vouchers do not immediately transfer the right to dispose of property, their provision constitutes, for VAT purposes, not a 'supply of goods' within the meaning of Article 5(1) of the Sixth Directive, but a 'supply of services' within the meaning of Article 6(1) of that directive, since, under Article 6(1), any transaction which does not constitute a supply of goods within the meaning of Article 5 is regarded as a supply of services."
Conclusion
LORD JUSTICE SULLIVAN
LORD JUSTICE MUMMERY