The High Court held that the supply of storage facilities for the personal luggage of passengers at UK airports was a zero-rated supply of services for VAT purposes.

Facts

The taxpayers provided storage facilities for the personal luggage of passengers at a number of UK airports. They accounted for VAT on the charges made for those services at the standard rate. In October 2003, the taxpayers claimed that their charges should have been zero-rated. Thereafter they claimed substantial refunds of VAT overpaid. They contended that their services fell within VATA 1994, Sch. 8, Grp. 8, items 6 and 11(a) and should therefore have been zero-rated under s. 30.

Customs argued that the services were standard-rated, since items 6 and 11 had to be interpreted by reference to Council Directive 77/388 (‘the sixth directive’), which meant that a commercial requirement was needed in respect of both items. The VAT tribunal held that, although items 6 and 11 had to be construed in accordance with the sixth directive if possible, item 6 dealt with ‘goods carried in a ship or aircraft’ and in the present case the goods either had been or were to be carried in an aircraft and so might not fall within the wording because of the tense used. Further, item 6 had to be considered in accordance with art. 15(9) of the sixth directive and in that context goods carried in a ship or aircraft were akin to cargo, i.e. having a commercial requirement. It followed that the supplies were not eligible for zero-rating under item 6. Item 11 referred to ‘goods’ and not to ‘goods carried in a ship or aircraft’. The word ‘goods’ was not akin to cargo but had a wider meaning and was more akin to chattels. That accorded with art. 15(13) dealing with the import and export of goods with no reference to cargo. Accordingly, the taxpayers' supplies fell within item 11 and were zero-rated to the extent that they were to be exported to, or had been imported from, a place outside the EU.

In principle, on the basis of the available figures, 76 per cent of the supplies qualified for zero-rating and the taxpayers' appeal would be allowed in part ([2006] BVC 4,097; Decision No. 19,627).

Customs and the taxpayers both appealed from the tribunal's conclusions in respect of items 11(a) and 6 respectively.

Issue

Whether the services provided by the taxpayers should be zero-rated for VAT purposes.

Decision

Sir Andrew Morritt C (allowing the taxpayers' appeal and dismissing Customs' appeal) said that the tribunal had approached the questions of construction relating to items 6 and 11 (a) on an erroneous basis. The tribunal had referred to art. 28(2)(a) of the sixth directive and the requirement thereby imposed that the permitted exemptions should accord with Community law. They then expressed the view that items 6 and 11 (a), should be construed in accordance with Community law. That was confirmed where the tribunal considered those items by reference to art. 15(9) and (13).

However, measures permitted by art. 28(2)(a) did not have to be interpreted by reference to and so as to accord so far as possible with harmonised measures from which they were a permitted derogation. Any other conclusion would be illogical. Accordingly items 6 and 11, in particular, had to be interpreted as self-standing derogating national provisions and not as harmonised community exemptions. (Marleasing SA v La Comercial Internacional de Alimentacion (Case C-106/89) [1990] ECR I-4135; EC Commission v UK (Case 416/85) [1988] BTC 5,220; [1988] ECR 3127; Ideal Tourisme v Belgium (Case C-36/99) [2000] ECR I-6049; Adam v Administration de l'enregistrement et des domains (Case C-267/99) [2003] BTC 5,240; [2001] ECR I-7467; and Marks & Spencer plc vC &E Commrs [2005] BTC 5,472; [2005] UKHL 53 considered.)

Such a derogation had to be strictly construed and might not exceed the derogation in force when the sixth directive entered into force, if its retention was to be permissible thereafter until the expiration of the transitional period which was continuing. To that extent the general rules of interpretation required the court to construe items 6 and 11 (a) so far as it properly could to avoid any breach by the UK of its treaty obligations. If items 6 and 11 (a) exceeded the derogation then in force they were not deprived of legal effect, but, as an exemption, should be construed strictly and, so far as possible, consistently with art. 14 and 15. Only to that extent did the general principles of construction, as laid down in Marleasing, require the court to interpret items 6 and 11(a) consistently with those articles.

Having considered the Explanatory Notes to the Value Added Tax (Transport) Order 1990 (SI 1990/752), an undated Explanatory Memorandum submitted by the Commissioners for Customs and Excise to the Select Committee on Statutory Instruments in relation to that order, and a statement of the Economic Secretary to the Treasury made in the House of Commons in relation to that order on 2 May 1990, the court could not accept Customs' submission to the effect that it was the clear intention of Parliament to bring items 6 and 11(a) so ‘into line with’ art. 15(9) and (13) that they did not extend to goods of any wider description than that warranted by those articles.

The VAT legislation as a whole spoke of ‘goods’ in the most general sense of the word. It might be restricted by its context but in the absence of such a restriction extended, at least, to all chattels and tangible personal property. There was nothing in either the word or the context afforded by items 6 or 11 (a) to limit the word to ‘goods for sale or resale’. It might be that the word ‘cargo’ was a convenient synonym for goods carried in a ship or aircraft or for goods transported from one place to another but it did not carry any implied limitation to ‘goods intended for sale or resale’ or to ‘commercial freight’. However, even if it did and cargo was normally stored or transported in a hold, that could not limit the ambit of the word ‘goods’ so as to exclude the personal or hand luggage of passengers.

Accordingly both items had to be considered on the basis that the word ‘goods’ embraced all chattels and tangible personal property. For the purposes of item 6 the chattels had to be ‘goods carried in a ship or aircraft’. On the facts found, the facilities for storage provided by the taxpayers was used in respect of goods of which 95 per cent had been or were to be carried on an aircraft. The word ‘carried’ was used adjectivally without any necessary reference to the time of carriage. The services supplied by the taxpayers to the extent found by the tribunal fell squarely within the terms of item 6. It was not suggested that that item went beyond the equivalent item in the 1983 Act as amended before 1 January 1991 so as to exceed the derogation permitted by art. 28(2)(a). To that extent, the taxpayers' appeal would be allowed. In those circumstances the question of the application of item 11 (a) did not arise because the 76 per cent to which it could apply were already included in the 95 per cent to which item 6 applied. Customs' appeal was dismissed.

Chancery Division.
Judgment delivered 9 February 2007.