[2006] EWCA Civ 29

The Court of Appeal held that the supply in the UK of ‘multifunction’ phonecards issued by the taxpayer from Ireland to distributors and retailers was subject to VAT in the UK.

Facts

The taxpayer, which was established in Ireland, supplied ‘multifunction’ phonecards to distributors and retailers in the UK. Customers who purchased cards from UK retailers were provided with telecom services by Interdirect, a company established in Ireland which, together with the taxpayer, was a member of a group of companies whose parent company was established in the US.

Interdirect was not the issuer of the phonecard which was therefore a ‘credit voucher’ for the purposes of VATA 1994, Sch. 10A, para. 3. Under Irish law, consideration paid for phone cards was deemed to be a pre-payment for telecom services and VAT was payable on that supply of services rather than at the time when the cards were redeemed and access was given to the telecom services. However no VAT was payable in Ireland when the cards were supplied to traders outside Ireland. Conversely under UK law pursuant to Sch. 10A, para. 3 VAT was chargeable when a card was redeemed, but by virtue of the place of supply rules derived from art. 9 of Directive 77/388 (‘the sixth directive’) where the telecom services were supplied from Ireland to UK nonbusiness users VAT could not be charged in the UK.

In those circumstances, Customs concluded that a situation of complete non-taxation was created as regards the supply of both the phonecards and the telecom services and took the view that, to prevent non-taxation under the sixth directive, that UK distributors of the phonecards were liable to account for VAT in the UK. The claimant was granted judicial review of that decision ([2005] BTC 5,163). The Revenue appealed to the Court of Appeal.

Issues

(1) Whether the avoidance of non-taxation, the avoidance of double taxation and the prevention of the distortion of competition were general principles of the sixth directive; (2) if so, whether any of those principles were violated by the conclusion that the supplies to the UK distributors of phone cards were not subject to VAT; (3) if so, whether those principles were excluded by the place of supply rules in the instant case; (4) if not, whether national implementing legislation should be construed so far as it could in accordance with those principles; (5) if so, whether VATA 1994, Sch. 10A, para. 3(3) could be interpreted as compatible with those principles so that the effect was that the disregard in para. 3(2) was inapplicable where the supply of telecommunications was not liable to VAT under Irish law.

Decision

Arden LJ (Latham and Pill LJJ concurring) (allowing the appeal) said that member states were under an obligation to interpret national law in conformity with a directive so far as possible. There was no reason why the same robust techniques used to make legislation compatible with the European Convention on Human Rights should not equally apply to make domestic legislation compatible with EU law.

(1) T he principles of avoidance of non-taxation, the avoidance of double taxation and the prevention of the distortion of competition were general principles of the sixth directive. One of the objectives of the directive was the harmonisation of rules on turnover taxes, and the directive contained mandatory rules as to which supplies should be taxable and where those supplies were deemed to take place. It had to follow from those provisions that one of the objectives of the directive was to prevent situations arising in which a taxable supply escaped taxation because it was not caught by the legislation of member states. It followed that, in the absence of an express provision for double taxation, it was not an objective of the directive to impose double taxation. Further the non-distortion of competition was referred to in the preamble to the directive as authority for the proposition that VAT should not operate to distort competition.

(2) The present case was 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 contained provisions in para. 3(2) and 3(3) designed to avoid double taxation and non-taxation respectively. However, the vouchers were essentially promises to supply telecommunications services and the provisions of the sixth directive applied to that supply. Therefore, if neither the issue of phonecards for Interdirect's telecommunications services nor the supply of those services to persons within the Community was subject to VAT, the principle of the avoidance of non-taxation was necessarily infringed. Likewise the principle that VAT law should not distort competition applied and it was on the facts infringed because Interdirect and its distributors were able to market its telecommunications services without having to account for VAT. That gave 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 the taxpayer to UK traders but that did not happen.

(3) Article 9(1) of the sixth directive set out the rules which applied to cases other than those for which there were specific rules set out in art. 9(2). Under art. 9(2), the place of supply for telecommunications services was the place where the customer was established if he was established outside the Community or was a taxable person within the Community. The place of supply rules in art. 9(2) took precedence over the general rule in art. 9(1) which was the residual category.

In this case the issue of a phonecard was no more than a promise to make such services available or to procure that such services were made available and therefore constituted a supply of telecommunications services within art. 9(2)(e). Therefore, the issue of phonecards to UK traders was subject to VAT in the UK and the judge erred in coming to the conclusion that the general principles of VAT law did not apply to this case.

(4) It was well-known that the provisions of VATA 1994, as the implementing legislation, had to be interpreted in conformity with the directive, and the supply of telecommunications services constituted a taxable supply for the purposes of the directive. The national court was under an obligation to interpret domestic legislation, so far as possible, in the light of the wording and purpose of a directive in order to achieve the result pursued by the directive and thereby comply with Community obligations. Accordingly the principle of legal certainty was not infringed in this case(Marleasing SA v La Comercial Internacional de Alimentacion SA (Case C-106/89) [1990] ECR I-4135 considered).

(5) The court was under an obligation to interpret Sch. 10A, 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 the taxpayer's phonecards, or other taxpayers in the same position. There had to be read into para. 3(3) a further disapplication of the disregard in para. 3(2) to make para. 3 conform to the objectives of the sixth directive. That interpretation gave effect to the wording and purpose of the sixth directive because it implemented the general principles of VAT law in respect of the harmonised rules 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 UK distributors be taxed in the place where such persons were established.

Court of Appeal (Civil Division). Judgment delivered 27 January 2006.