Case No: CH/2004/APP/0323
Neutral Citation Number: [2004] EWHC 2541 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 12 November 2004

THE HONOURABLE MR JUSTICE PUMFREY
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Between :

	 Commissioners for Customs and Excise	Appellant	
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	Isle of Wight Council	Respondent	

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Christopher Vajda Q.C. and Paul Harris (instructed by Solicitor’s office, Commissioners for Customs & Excise) for the Appellant
Julie Anderson (instructed by Linda Leach of Chiltern plc) for the Respondent

Hearing dates: 26 & 27 October 2004 
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Judgment

Mr Justice Pumfrey :
Introduction
1.	This is an Appeal by the Commissioners of Customs and Excise (‘The Commissioners’) against the decision of the VAT and Duties Tribunal (Stephen Oliver Q.C. Chairman) dated 6th April 2004.  The decision of the Tribunal decides two preliminary issues in an appeal by the Council against the Commissioners’ refusal to pay a claim made under section 80 of the Value Added Tax Act 1994 (‘VATA’).  I can quote from the Tribunal’s decision setting out the issues with which it is confronted:  
“2. The Appeal concerns the  Council’s liability to VAT on payments received in respect of its operation of off-street parking facilities.  The Appeal raises four issues: 
The first (“the special legal régime issue”) is whether, as the Council contends, its provision of off-street parking facilities is excluded from charge to VAT by the operation of article 4.5 of the EC Sixth Directive as being “activities or transactions in which they engage as public authorities”;
The second (“the implementation issue”) is whether the second paragraph of article 4.5 (which treats as taxable persons local authorities that engage in such activities (“where treatment as non-taxable would lead to significant distortions of competition”) has been properly implemented into UK law;
The third (“the competition issue”) is whether, as the Commissioners contend and assuming that the second paragraph of article 4.5 has been properly implement, treatment of the Council as a non-taxable person would lead to significant distortions of competition and
The fourth (“the overpayment issue”) is whether VAT  is chargeable on amount which exceed the published tariff in circumstances where the parking machine cannot give change.”
2.	 In its decision, the Tribunal considered only the first and second questions.  It resolved the special legal régime issue in favour of the council, and the Commissioners do not appeal against that decision.  The only issue which arises on the present appeal is the implementation issue.
3.	By their Notice of Appeal, the Commissioners contend (1) that article 4.5 of the Sixth Directive has been properly implemented into UK domestic law by a combination 3, 4 and 42 of VATA “as properly construed and interpreted in the light of the Sixth Directive”; (2) the Council is not able, as a matter of law, to rely upon and apply the first sub-paragraph of article 4.5 without also accepting the application of the second sub-paragraph of article 4.5; (3) moreover, even if the second sub-paragraph of article 4.5 has not been properly implemented into domestic UK law in whole or in part the Commissioners are entitled and/or obliged to apply and rely upon both the first and second sub-paragraph of article 4.5 in relation to the council which is an “emanation of the state”.
4.	It was common ground at the hearing before me that there were two issues to be considered.  First, whether it was possible to interpret the relevant provisions of VATA so as to be consistent with the provisions of the Sixth Directive in an application of what is usually called the Marleasing principle. Second, if the Marleasing principle was incapable of application, whether as between the Council and the Commissioners the provisions of article 4.5 were of direct effect, either (as the Commissioners contend) in their entirety or (as the Council contends) as to the first sentence only.
5.	The decision of the Tribunal is concerned with the first of these questions only. Although the question of direct effect is referred to in the Commissioners’ Skeleton Argument before the Tribunal, I think it is fair to say that occupies a rather subordinate position and I understand also that the greater part of the argument before the Tribunal  was devoted to the Marleasing doctrine,  to which the question of direct applicability was presented as a fall-back argument in a few paragraphs.
Conclusions
6.	My conclusions are as follows. (1) The whole of article 4.5 of the Sixth Directive is directly applicable as between the Council and the Commissioners.  It follows that the Tribunal must embark upon the factual investigation called for by the third and fourth issues in the Appeal which I have set out above.  (2) The Marleasing doctrine is of doubtful applicability in the present case.  Although it is not necessary to decide the question having regard to my conclusions on the issue of direct applicability, it seems to me that to attempt to get over the various problems presented by VATA by a  wholesale rewriting of the kind suggested by the Commissioners lies at the very edge of a permissible approach to the Marleasing doctrine.
7.	My reasons for these conclusions are as follows.
The Domestic Provisions
8.	By section 4(1) of VATA, VAT shall be charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course of furtherance of any business carried on by him. Sub-section (2) defines “taxable supply” as a “supply of goods or services made in the United Kingdom other than an exempt supply”.
9.	Section 3 of VATA defines a “taxable person” for the purposes of the act as a person who is or required to be registered under the Act.  By section 42 ‘a local authority which makes taxable supplies is liable to be registered under this Act, whatever the value of the supplies; and accordingly Schedule 1 shall apply, in a case where the value of the taxable supply made by a local authority in any period of one year does not exceed the sum for the time being specified in paragraph 1(1)(a) of that schedule as if that value exceeded that sum’. It follows that any local authority which makes taxable supplies is liable to VAT on the value of the supplies whether or not they exceed the threshold applicable to other taxable persons. 
10.	Section 31 VATA defines exempt supplies as supplies of a description for the time being specified in Schedule 9 to the Act, and does not need to be considered further. Section 94 defines “business” as including any trade, profession or vocation.  This definition is an inclusive definition, and it is plainly very wide.  Its scope is unaffected by the deeming provision contained in sub-section 94(2) to which it is not necessary to refer.  As a matter of ordinary construction, the scheme of the charging provision so far as they affect local authorities is, it seems to me, quite clear.  Local authorities pay VAT on all supplies falling within sub-section 4(1).
11.	The Council, and other local authorities, contend that this is entirely inconsistent with the provisions of the Sixth Council Directive of 17th May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes/common system of value added tax: uniform bases of assessment (77/388/EEC) (“the Sixth Directive”).  To those provisions I now turn.
The Sixth Directive
12.	By Article 4.1, “taxable person” shall mean “any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purposes or results of that activity”.  Paragraph 2 provides that 
“the economic activities referred to in paragraph 1 shall comprise all activities of produces, traders and persons supplying services including mining and agriculture activities and activities of the profession.  The exploitation of tangible and intangible property for the purpose for obtaining income there from on a continuing basis shall also be considered an economic activity.” 
 By article 4.5:
“States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, in connection with these activities or transactions.
However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition.
In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided that they are not carried out on such a small scale as to be negligible.
Member states may consider activities of these bodies which are exempt under article 13 or 28 as activities which they engage in as public authorities.”
13.	Article 4.5 exempts the specified public authorities from the charge to tax on the basis of who they are rather than on the nature of the business carried on by them.  The effect of the second paragraph, article 4.5(2) is to remove that exemption if the activities of the public authority would lead to significant distortions of competition if the public authority is treated as a non-taxable person.  Plainly, the effect of the domestic provision is nothing like this.  Indeed, it seems to start from the opposite end of the spectrum, making all public authorities chargeable to tax whenever they make a taxable supply or, in other words, a non-exempt supply of goods or services in the furtherance of any business.  The only qualification, therefore, on the charge imposed by VATA is that it must be made in the course of business.  There is no qualification by reference to the person making the supply nor to its effects on competition.
14.	If the Sixth Directive has not been implemented into English law, then the Commissioners cannot rely on the non-implementation against the local authority. Thus the Tribunal first considered the threshold question which is whether the activities of the local authority were carried on under a “special legal régime”, which determines as a matter of Community law whether the local authority can take the benefit of the first paragraph of article 4.5.  The crucial question is whether the second paragraph of the article is also applicable as between the Commissioners and the local authority. The Commissioners say that it is, and the local authority say that it is not.
15.	Notwithstanding the plainly different approach to the manner in which the charge to VAT is made by VATA, Mr Vajda Q.C. submits on behalf of the Commissioners that it is possible to construe VATA so as to be consistent with article 4.5 of the directive.  If such a construction is possible, then the Marleasing doctrine obliges the court to construe the domestic provision in that way and thereby incorporate the second paragraph.
The Marleasing Doctrine
16.	In Case C106/89 Marleasing, the ECJ was concerned with a provision of national law in Spain which provided that a contract whose underlying purpose was unlawful was a nullity. Marleasing was a company which was a creditor of a company in liquidation which it alleged had disposed of its assets to a third company set up for that purpose.  Although there was no specific provision of Spanish company law providing for the illegality of the third company, Marleasing nevertheless sought to suggest, on the basis of the general principal of Spanish law to which I have referred that the “founders contract” of the third company was a nullity and so, therefore, was the third company.  Council Directive 68//151/EEC provided in article 11 for the cases in which the nullity of the company might be declared which did not include the lack of a lawful purpose.  The question that was referred to the court was “is article 11 of Council Directive 68/115/EEC of 9th March 1968, which has not been implemented in national law, directly applicable so as to preclude a declaration of nullity of a public limited company on a ground other than those set out in the said article?
17.	The judgment of the court, so far as material, was as follows:
“ 6. With regard to the question whether an individual may rely on the directive against a national law, it should be observed that, as the Court has consistently held, a directive may not of itself impose obligations on an individual and, consequently, a provision of a directive may not be relied upon as such against such a person (judgment in case 152/84 Marshall v. Southampton and South West Hampshire Area Health Authority  [1986] ECR 723 ).
7. However, it is apparent from the documents before the Court that  the national court seeks in substance  to ascertain whether a national court hearing a case which falls within the scope of directive 68/151 is required to interpret its national law in the light of the wording and the purpose of that directive in order to preclude a declaration nullity of a public limited company on a ground other than those listed in article 11 of the directive.
8. In order to reply to that question, it should be observed that, as the court pointed out in its judgment in Case 14/83 Von Colson and Kamann v. Land and Nordrhein-Westfalen [1984] ECR 1891 paragraph 26, the Member States’ obligation arising from a directive to achieve the result envisaged by the directive and their duty article 5 of the Treaty to take all appropriate measures, whether general or particular, to ensure the fulfilment of that obligation, is binding on all the authorities of Member States, including, for matters within their jurisdiction, the courts.  It follows that, in applying national law, whether the provisions in question were adopted before or after the directive, the national court called upon to interpret it is required to do so, as far as possible, in the light of the wording and the purpose of the directive in order to achieve the result pursued by the latter and thereby comply with the third paragraph of Article 189 of the Treaty.
9. It follows that the requirement that national law must be interpreted in conformity with article 11 of Directive 68/151 precludes the interpretation of provisions and national law relating to public limited companies in such a manner that the nullity may be ordered on grounds other than those exhaustively listed in article 11 of the directive in question.”
18.	The court goes on to explain that article 11 of the first directive is intended to affect only companies whose express objects are unlawful, but not companies incorporated by persons with an unlawful purpose, such as defrauding creditors, in mind.  This meant that the general provision of Spanish Law yielded to the unimplemented provision of the directive.
19.	Advocate General Jacobs has gone some way to explain the meaning of the words “of itself” emphasised in the quotation from the judgment in Marleasing case above in Case C-456/98 Centrosteel  [2000] I–6007.  He considered (and the court followed his view) that an express provision of the case law of the Italian Corte di Cassazione had to yield to a contrary provision of a relevant directive and he summarised the position as follows:
“35 in summary, I am of the opinion that the courts case law establishes two  rules: (1) a directive cannot of itself impose obligations on individuals in the absence of proper implementation in national law; (2) the national courts must nevertheless interpret national law, as far as possible, in the light of the wording and purpose of the relevant directive.  While that process of interpretation cannot, of itself and independently of a national law implementing the directive, have the effect of determining or aggravating criminal liability, it may well lead to the imposition upon an individual of civil liability or a civil obligation which would not otherwise have existed.”
20.	The principle expressed in this way is of very wide import.  The reference to imposing a liability “where one would not have otherwise existed” strongly suggests that a mere process of interpretation, at least as that term would normally be understood in this jurisdiction, is not being used.  Indeed, the extent of its application can be seen in the recent case in the Court of Appeal Alderson v. Secretary of State for Trade and Industry  [2003] EWCA Civ 1767. This was a direct action against the Secretary of State for Trade and Industry for failure properly to transpose Council Directive 77/187/EC into national law.  This directive (“the Acquired Rights Directive” or “ARD”) provided by article 1 that it applied to “the transfer of an undertaking in business or part of a business to another employer as a result of a legal transfer or merger”.  It contained no definition of “undertaking” or of “business”.  In their original form, the Transfer of Undertakings (Protection of Employment) Regulations 1981 defined undertaking as including “any trade or business but does not include any undertaking or part of an undertaking which is not in the nature of a commercial venture”. I have emphasised the offending words. In short, the claimants’ case was that they had accepted employment with a successor undertaking to their original employer, the Liverpool City Council, on the footing that TUPE did not apply to them because the City Council’s refuse collection service was not “in the nature of a commercial venture”.  Had the directive been correctly transposed, they would not, they contended, have had to accept terms inferior to those on which they had hitherto worked.  In rejecting the claim for damages, the Court of Appeal held that the definition, which had incidentally been held to represent a failure by the United Kingdom properly to transpose the directive into English law (see case C–382/92 Commission v. United Kingdom [1994] ECR I–2435 at paragraph 47 of the judgment), fell to be read by virtue of Marleasing  principle as if the offending words were not  present.
21.	The principle is therefore clear enough.  Another application may be seen in Litster v. Forth Dry Dock Engineering Company Limited [1990] 1 AC 546.  In that case the House of Lords implied into a clause which defined a person protected by TUPE as “a person so employed immediately before the transfer” the additional words “or would have been so employed if he had not been unfairly dismissed in the circumstance described by Regulation 8 (1)”.
22.	With this approach in mind, Mr Vajda Q.C. suggests that the effect of article 4.5 of the Sixth Directive can be achieved by reading additional words into the definition of “business” contained in section 94 of the VATA.  His suggested emendation is as follows:
“In this act  “business” includes any trade profession, or vocation and all the economic activities of local authorities, except where those activities are carried out pursuant to a special legal régime different to that applicable to private traders, unless to treat such special legal régime activities  as non-business would lead to significant distortions of competition.”
23.	If the provisions of article 4.5 are to be mirrored in the suggested definition, it seems to me that Mr Vajda’s words “except where those activities are carried out pursuant to a special legal régime different to that applicable to private traders” should be replace by the words “in which they engage as public authorities”.  It is also necessary to replace the words “unless to treat such special legal régime activities as non-business” by the words “unless their treatment as non-taxable persons in respect of such activities”.
24.	Emendations of this nature, Mr Vajda submits, have the effect of giving the charging provisions of the VATA  an effect identical to those of the directive in its treatment of local authorities.  On the assumption that this is true, it seems to me nonetheless that to reach such a result by a process of “interpretation” is to undertake a task which is really not possible.  I accept that the Marleasing principle goes a long way, but it seems to me clear that the UK legislature has made a deliberate decision in its treatment of local authorities, and the emendations are really neither by way of explanation nor by way of correction but, on the contrary, create an entirely new charging régime for them. My doubts are based on the consideration that to qualify the definition of “business” in this way is not a general qualification but one to be used only when the taxpayer is a local authority. The definition of “business” will only take so much strain, and I think there is some risk that the safe limit is here exceeded.
25.	The Commissioners draw support for their contention from the judgment of Tuckey J. in Institute of Chartered Accountants in England and Wales v. Customs and Excise Commissioners [1996] STC 799.  The question in that case was whether the ICA was making a taxable supply when it charged a fee to the various persons to whom it granted licenses pursuant to various statutory schemes to permit the carrying on of investment business, and to auditors and insolvency practitioners.  The Commissioners contended that this activity of the ICA was not the supply of services made in the course of  the furtherance of a business.  Tuckey J. upheld the decision of the Commissioners and of the Tribunal, but he considered the Commissioners’ alternative case that the ICA should not be considered to be a taxable person because it was a body “governed by public law” engaging in activities or transactions “as a public authority” within article 4.5.  It was not strictly necessary, therefore, for Tuckey J. to consider whether the whole of article 4.5 was to be taken to be forming part of domestic law for this purpose.   He expressed the preliminary view that article 4.5 has implicitly been incorporated into the 1994 Act.  In the appeal to the House of Lords, the House paid no attention to the definition of “business” at all, merely deciding whether in the light of the European authorities the ICA could be taken to be involved in a “economic activity” in granting licenses for a consideration.  It was accepted that the expression “business” represents the words “economic activities” in the directive. This is obviously some authority for the proposition that the whole of article 4.5 is to read in to the English statute, but Tuckey J did not have to consider the non-availability of the second paragraph to the Commissioners unless it was implemented in UK law and the point was not discussed.  
26.	There is some direct support for the view that the whole of article 4.5 forms part of domestic law in consequence of the obligations placed upon the judiciary by the Marleasing principle in the decision of the Tribunal in Rhondda Cynon Taff County Borough Council v. Commissioners of Customs and Excise (16th December 1999) (Decision Number 16496).  The activity at issue in this case was the provision and maintenance of cemeteries.  The tribunal simply decided the case under the provisions of article 4.5 of the Sixth Directive. In this case the Tribunal based itself on the decision of the ECJ in Case C-231/87 Carpaneto [1989] ECR 3233. Relying on that case for the proposition that Member States were required to ensure that bodies governed by public law were treated as taxable persons where the contrary would lead to significant distortions of competition without literally transposing that criterion into national law, the Tribunal concluded that
‘…article 4.5 should not be dissected and …reliance should not be placed on the first indent while ignoring the second. The second indent is an extension of the first and both together provide that public bodies are not taxable persons when they are acting as such but that they are taxable persons when their activities would create significant distortions of competition.’
27.	Case C-231/87 Carpaneto was another case involving cemeteries. The appellant was a local authority who provided certain services relating to cemeteries. The questions of interest are the first and the fourth:
‘(1) whether the principle set out in the first sub-paragraph of article 4(5) of the Sixth Directive, which excludes from the category of activities subject to VAT so-called ‘institutional’ activities is directly applicable in the absence of a specific national provision;
…
(4) whether the second subparagraph of article 4(5) must be interpreted as requiring the Member States to incorporate in their VAT legislation the criterion of ‘significant distortions of competition’ in regard to the taxation of the transactions referred to in the first subparagraph.’
28.	The second question is one of interpretation, and it is on the analysis of this question that the Tribunal based itself in the Rhondda Cynon Taff case in concluding that the first and second sub-paragraphs of art 4.5 should be read together:
’21. It should first be pointed out that it follows from both the wording and structure of Article 4(5) of the Sixth Directive that the expression “these activities or transactions” in the second subparagraph corresponds to the activities or transactions referred to in the first subparagraph, that is to say, activities or transactions engaged in by bodies governed by public law as public authorities, to the exclusion, as indicated above, of activities engaged by them as persons subject to private law.
22 It should next be noted that the second subparagraph of that provision contains a derogation from the rule of treatment of bodies governed by public law as non-taxable persons in respect of activities or transactions engaged in by them as public authorities where that treatment would lead to significant distortions of competition. Thus, with a view to ensuring the neutrality of the tax, which is the major objective of the Sixth Directive, that provision envisages the situation in which bodies governed by public law engage, under the special legal regime applicable to them, in activities which may also be engaged in, in competition with them, by private individuals under a regime governed by private law or on the basis of administrative concessions.

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

24 The answer to the second question should therefore be that the second subparagraph of Article 4(5) of the Sixth Directive must be interpreted as meaning that the Member States are required to ensure that bodies governed by public law are treated as taxable persons in respect of activities in which they engage as public authorities where those activities may also be engaged in, in competition with them, by private individuals, in cases in which the treatment of those bodies as non-taxable persons could lead to significant distortions of competition, but they are not obliged to transpose that criterion literally into their national law or to lay down precise quantitative limits for such treatment.’
29.	It seems to me that while this relates directly to the question of direct applicability, it is of no assistance in the application of the Marleasing doctrine. After all, the Marleasing doctrine applies in circumstances when there is no direct effect (for example horizontally as between citizens) and while this makes it clear that the first two subparagraphs of article 4.5 must be read together, it does not help on the question with which I am confronted, which is whether VATA can be coerced by any process of interpretation into a state of consistency with the Sixth Directive. I am inclined to the view that it cannot, but I do not need to come to a concluded view since I am of the clear view that the first two subparagraphs of article 4.5 are directly applicable between the Commissioners and the local authority. To that question I now turn.
Direct applicability of article 4.5
30.	It is, of course, well established that provided that certain requirements are satisfied a Directive may have direct effect as between the individual and the State to nullify inconsistent provisions in domestic law. The question of the direct effect of article 4.5 is dealt with expressly in Carpaneto:
29 The fourth question seeks to ascertain whether a body governed by public law may rely on Article 4(5) of the Sixth Directive for the purpose of opposing the application of a national provision making it subject to VAT in respect of an activity in which it was engaged as a public authority and which is not listed in Annex D, where treatment of the activity as non-taxable is not liable to give rise to significant distortions of competition.
30 As the Court has consistently held (see, in particular, the judgment of 19 January 1982 in Case 8/81 Becker v Finanzamt Muenster-Innenstadt [1982] ECR 53), wherever the provisions of a directive appear, as far as their subject-matter is concerned, to be unconditional and sufficiently precise, those provisions may, in the absence of implementing measures adopted within the prescribed period, be relied upon as against any national provision which is incompatible with the directive or in so far as the provisions define rights which individuals are able to assert against the State.
31 Article 4(5) of the Sixth Directive fulfils those criteria, since the bodies and activities in regard to which the rule of treatment as non-taxable persons applies are clearly defined in that provision. Bodies governed by public law, which, in this context must be assimilated to individuals, are therefore entitled to rely on that rule in respect of activities engaged in as public authorities but not listed in Annex D to the directive.
32 That conclusion is not invalidated by the fact that the second subparagraph of Article 4(5) of the Sixth Directive requires activities to be treated as taxable if their treatment as non-taxable would lead to significant distortions of competition. That limitation placed on the rule of treatment as non-taxable persons is thus only a conditional limitation, and whilst it is true that its application involves an assessment of economic circumstances, that assessment is not exempt from judicial review.
33 The answer to the fourth question should therefore be that a body governed by public law may rely on Article 4(5) of the Sixth Directive for the purpose of opposing the application of a national provision making it subject to VAT in respect of an activity in which it engages as a public authority, which is not listed in Annex D and whose treatment as non-taxable is not liable to give rise to significant distortions of competition’
31.	This case is binding authority that the first two subparagraphs of article 4.5 are unconditional and sufficiently precise to bind the Commissioners. The court explicitly formulates the answer in paragraph 33 to restrict its benefit to public authorities whose treatment as non-taxable is not liable to give rise to significant distortions of competition. That question is, by paragraph 32, ‘a conditional limitation’ which requires an assessment that is not exempt from judicial review. 
32.	It would not be correct to see this as a case in which the local authority cannot take the benefit of article 4.5(1) without assuming the burden of article 4.5(2). It might have been that article 4.5(2) was too uncertain to have direct effect. But the decision of the court is to the contrary. It follows, it seems to me, that before acceding to the local authority’s claim the Tribunal is bound to investigate whether its treatment as non-taxable in the activity in respect of which repayment of tax is sought is liable to give rise to a serious distortion of competition.
33.	The question of direct effect did not have the same prominence before the Tribunal that it did before me. I can see some good reasons why the Tribunal may be right in the approach it took to the Marleasing doctrine, but the Commissioners’ appeal must be allowed for the reasons I have given.