The European Court of Justice (Third Chamber) ruled, inter alia, that where, under art. 28(2) of Council Directive 77/388 (the sixth directive), a member state had mistakenly interpreted its national legislation, with the consequence that certain supplies benefiting from exemption with refund of input tax under its national legislation had been subject to tax at the standard rate, the general principles of Community law, including that of fiscal neutrality, applied so as to give a trader who had made such supplies a right to recover the sums mistakenly charged in respect of them.

Facts

The supply of food was in general zero-rated for VAT, confectionery being one exception. There was an exception to that exception in that cakes or biscuits were in general also zero-rated. There was however an exception to that exception to the exception, in that biscuits wholly or partly covered with chocolate were standard-rated.

From 1973 when VAT was introduced, Customs took the view that the taxpayer's teacakes, which were covered with chocolate, were biscuits and therefore standard-rated. The taxpayer accounted for VAT on that basis but in September 1994 Customs admitted they had been wrong and that the teacakes were cakes and should have been zero-rated. The taxpayer claimed repayment of all the VAT for which it had wrongly accounted over the years, totalling £3.5m.

Section 80 of VATA 1994 gave a limited right to repayment but Customs invoked the defence in s. 80(3) contending that repayment would unjustly enrich the taxpayer since it had passed on 90 per cent of the VAT to its customers. After hearing expert evidence about the market for teacakes, the VAT tribunal accepted that submission and held that the taxpayer was entitled to only ten per cent of its claim ([1997] BVC 2,243). The taxpayer no longer disputed that, as a matter of domestic law, that finding was correct. Instead, it claimed that it had a right to repayment not only under s. 80 but also as a matter of Community law and that it would be contrary to principles of Community law for that right to be restricted by the defence of unjust enrichment.

Moses J dismissed the taxpayer's appeal ([1999] BTC 5,073). The ECJ gave a preliminary ruling ((Case C-62/00) [2002] BTC 5,477; [2002] ECR I-6325) on a reference by the Court of Appeal ([2000] BTC 5,003) and, in the light of that ruling, a second Court of Appeal dismissed the appeal in the teacakes claim on the question of unjust enrichment ([2004] BTC 5,091).

The taxpayer appealed to the House of Lords whichr said that there was no doubt that if a member state charged VAT in breach of the rules of Community law, a Community right to repayment would be implied. Whether such a right would be incompatible with the unjust enrichment defence was a matter in dispute. But for such a right to arise in the first place, the charge to VAT must have been in breach of the rules of Community law. Accordingly, the proceedings were stayed and questions referred to the European Court of Justice for a preliminary ruling.

Issue

Whether there was a right under Community law to have a particular transaction taxed at a zero rate of VAT; whether there was a right, under Community law, to a refund of VAT paid in error; whether there were possible restrictions on the right to repayment based on the principles of equal treatment and fiscal neutrality; whether the position would be different if there was evidence that a trader refused repayment on the ground of unjust enrichment had not suffered any financial loss or disadvantage; and whether Community law required or permitted a national court to remedy the infringement of the principle of equal treatment by ordering that the tax wrongly levied be repaid in full, even if the taxpayer would be unjustly enriched.

Decision

The European Court of Justice (Third Chamber) (ruling accordingly) said that where, under art. 28(2) of Council Directive 77/388 (the sixth directive) a member state had maintained in its national legislation an exemption with refund of input tax in respect of certain specified supplies, a trader making such supplies did not have any directly enforceable Community law right to have those supplies taxed at a zero rate of VAT. In authorising member states to apply exemptions with refund of the tax paid, art. 28(2) laid down a derogation to the rules which governed the standard rate of VAT and it was by reason of Community law that those exemptions, known as ‘zero-rating’, were permitted.

Article 28(2)(a) could therefore be compared to a ‘stand-still’ clause, intended to prevent social hardship following from the abolition of exemptions provided for by the national legislature but not included in the sixth directive.

The taxpayer could not validly rely on art. 12(1) of the sixth directive, the purpose of which was to settle the issue of determining the temporal point of reference for applying a given rate of VAT. The situation in this case, in which Customs established that there had been an error as to whether a particular product should have been entitled to an exemption with refund of the tax paid, was completely different. This was a question, not of a change in the rate over time, but whether a product was covered by an exemption with refund of the tax paid, permitted under art. 28(2)(a).

The principles governing the common system of VAT, including that of fiscal neutrality, applied even to the circumstances provided for in art. 28(2) and might, if necessary, be relied on by a taxable person against a national provision, or the application thereof, which failed to have regard to those principles. The right to obtain a refund of charges levied in a member state in breach of rules of Community law was the consequence and the complement of the rights conferred directly on individuals by Community law.

That principle also applied to charges levied in breach of national legislation permitted under art. 28(2). Although the principles of equal treatment and fiscal neutrality applied in principle to the present case, an infringement of those principles was not constituted merely by the fact that a refusal to make repayment was based on the unjust enrichment of the taxable person concerned. By contrast, the principle of fiscal neutrality precluded the concept of unjust enrichment from being applied only to taxable persons such as ‘payment traders’ (taxable persons for whom, in a given prescribed accounting period, the output tax collected exceeds the input tax) and not to taxable persons such as ‘repayment traders’ (taxable persons whose position was the inverse of that of payment traders), in so far as those taxable persons had marketed similar goods. It was for the national court to determine whether that was the position in this case.

The general principle of equal treatment thus applied in a situation where traders were all holders of VAT credits, sought to obtain repayment from the tax authorities and found that their claims for a refund were treated differently, irrespective of the competitive relationships which might exist between them. Under national legislation such as VATA 1994, s. 80, the difference in the treatment of traders with regard to the notion of unjust enrichment on the basis of their initial position as creditors or debtors vis-á-vis the Treasury in respect of VAT was not objectively justified. The fact that a trader benefited from unjust enrichment was unrelated to the position of that trader vis-á-vis the tax authorities before repayment of the VAT. The unjust enrichment stemmed, when it occurred, from the refund itself, and not from that trader's previous situation as a creditor or debtor vis-á- vis the tax authorities.

Furthermore, the general principle of equal treatment, the infringement of which might be established, in matters relating to tax, by discrimination affecting traders who were not necessarily in competition with each other but were nevertheless in a similar situation in other respects, precluded discrimination between ‘payment traders’ and ‘repayment traders’, which was not objectively justified. That conclusion was not affected where there was evidence that a trader who had been refused repayment of VAT which was wrongly levied had not suffered any financial loss or disadvantage.

It was for the national court itself to draw any conclusions with respect to the past from the infringement of the principle of equal treatment in accordance with the rules relating to the temporal effects of the national legislation applicable in the main proceedings, in compliance with Community law and, in particular, with the principle of equal treatment and the principle that it must ensure that the remedies which it grants were not contrary to Community law.

European Court of Justice (Third Chamber).
Judgment delivered 10 April 2008.