The Scottish Court of Session made a reference to the European Court of Justice for a preliminary ruling on the correct interpretation of art. 19 of Council Directive 77/388 governing the calculation of the deductible proportion of residual input tax to enable the court to determine the appropriate recovery method on input tax on the general overheads and costs of a bank in the various sectors of its business.

Facts

In three appeals by the taxpayer, the VAT tribunal directed that it should be determined as a preliminary issue whether, when calculating the proportion of residual input tax deductible in respect of each sector of its business under a partial exemption special method, the taxpayer was entitled to round up the proportion to the next whole number.

In May 2002, a framework was agreed between the taxpayer and other banks and Customs which provided for the use of a special method of calculating the deductible proportion of residual input tax. It provided specifically for rounding up the resulting proportion to two decimal places. In November 2004, the taxpayer decided that the rounding in respect of each sector should conform to the nearest whole number provision in art. 19 of Council Directive 77/388 (‘the sixth directive’).

The tribunal concluded that art. 19(1) specifically dealt with partial exemption standard methods and allowed rounding up to the next unit in respect of such methods. The sub-paragraphs of art. 17 allowed member states to implement special methods. No restriction was placed on the special methods, no mention was made of rounding and, since by definition a special method derogated from the prescribed standard method, there was no objection to an agreement allowing for a different form of rounding than to the next whole unit. Accordingly, the preliminary issue was decided in favour of Customs ([2006] BVC 4,057; Decision No. 19,429).

The taxpayer appealed to the Scottish Court of Session.

Issue

Whether, in a special method of calculation of recoverable input tax, the taxpayer was entitled to round up the deductible proportions of VAT calculated for each of the sectors of its business to a figure not exceeding the next unit; and whether, in rounding up to a figure not exceeding the next unit, the taxpayer was entitled to round up to the next whole number.

Decision

The Scottish Court of Session (Lord Justice Clerk (Gill), Lord Osborne and Lady Cosgrove) (making a reference to the European Court of Justice) said that this was a case about the special method which the parties had agreed to apply. The questions in the appeal depended on the interpretation of the sixth directive and the case should be referred to the ECJ.

In R v International Stock Exchange, ex parte Else (1982) Ltd [1993] QB 534, Sir Thomas Bingham MR described the approach that a national court should take to a question of this kind. In his view, if the facts had been found and the Community law issue was critical to the court's final decision, the appropriate course was ordinarily to refer the issue to the ECJ unless the national court could with complete confidence resolve the issue itself. Among the factors that he considered to be relevant to the court's decision on that point, the Master of the Rolls mentioned the need for uniform interpretation throughout the Community and the agreed advantages enjoyed by the ECJ in construing Community instruments. He concluded that if the national court had any real doubt, it should ordinarily refer and the court agreed with that approach.

Customs' position on the first issue was sound. A value-based calculation made under art. 19(1) applied only to the standard method to which the first and second paragraphs of art. 17(5) referred. Both sides accepted that the value-based standard method was at best a reasonable proxy for what was a use-based entitlement to deduct input tax (cf. art. 17(1)). The primary reason for having a special method was that in certain cases such a method might be capable of achieving a greater degree of accuracy. The details of a special method in a case such as this were a matter for agreement. If such a method should involve the calculation at any stage of a fraction of the kind prescribed by art. 19(1), the resulting proportion might be rounded up in any way that the parties might choose.

However, the solution to the first issue depended critically on the construction of the directive and was by no means cut and dried. It could not be said that it could be resolved with the complete confidence to which the Master of the Rolls referred in ex parte Else. It was pre-eminently a Community law issue; and it was an important issue on which it was desirable that the ECJ should rule.

The second question was more straightforward but was ancillary to the first and it involved the interpretation of a provision in the directive on which the other language versions seemed not to be uniform.

Accordingly, the reference should comprehend both questions.

Scottish Court of Session (Inner House, Second Division).
Judgment delivered 21 February 2007.