The High Court held that, by virtue of VATA 1994, s. 30(3) and Sch. 8, Grp, 8, item 1, there was no VAT liability upon the importation of a replica barge into the UK by a taxpayer for the purposes of living on it.

Facts

The taxpayer was a naval officer. In anticipation of his retirement, he purchased the Kei, a newly constructed replica Dutch barge, from a boat builder in Holland.

The vessel was specially designed for him and included living and office space. Although it was described as a barge, it was not designed for the carriage of cargo or intended for such use. The gross tonnage of the vessel exceeded 15 tons and it was able to proceed under its own power.

Customs decided that the importation of the vessel was liable to VAT pursuant to VATA 1994, s. 1(1)(b) since the vessel was not a ‘qualifying ship’ within the meaning of VATA 1994, Sch. 8, Grp. 8, Note (A1)(a), and that its supply was not, therefore, zero-rated under item 1 of Grp. 8. They took the view that the vessel had been constructed or adapted for use for recreation or pleasure. They argued first, that the judgment in Everett ([1995] BVC 673; Decision No. 11,736), in which it was held that Dutch barges converted into houseboats were not designed or adapted for use for recreation or pleasure, was wrongly decided; and second, that if Everett was correctly decided, it should be limited to its own facts.

The taxpayer submitted that the vessel had not been designed or adapted for pleasure and relied on a number of factors including that: (1) the taxpayer had considerable input into the design of the vessel as a dwelling; (2) the sleeping facilities were capable of supporting permanent habitation; (3) the galley was comparable to a domestic kitchen; (4) there was an airing cupboard, clothes dryer and domestic hot water system; (5) the internal and external appearance was that of a permanent dwelling; and (6) the design of the hull and engine was of a traditional commercial nature rather than of a pleasure craft.

The VAT tribunal held that, despite the parties' agreement that the vessel had not been adapted, it was an adaptation. The design on which it was based was itself an adaptation of a Dutch barge, and the design of the vessel was, in turn, adapted by the taxpayer to create something that would be both his family home and his office. The fact that the vessel might be used for recreation or pleasure was not sufficient to take it outside the definition of a qualifying ship. The vessel was designed with multiple purpose use in mind and it was not open to Customs to select one of those purposes in order to exclude it from zero-rating. The present case was distinguishable from Everett in that the vessel was seaworthy and sea-going, whereas in Everett the engines were retained only as items of interest. In any event, the purpose for which the taxpayer intended taking the vessel to sea was to carry out his business. The intended use could not be classified as either recreation or pleasure and zero-rating applied under item 1 of Grp. 8 ([2007] BVC 4,109; Decision No. 20,229). Customs appealed.

Article 15(5) of Council Directive 77/388 (‘the sixth directive’) provided for the deduction or refund of input tax in relation to, inter alia, vessels ‘used for navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities’. Article 28(2) provided for exemptions in force at 31 December 1975 to be maintained until an unspecified date to be fixed.

Issues

Whether the importation of the vessel would be zero rated if considered solely on the basis of VATA 1994, s. 1(1)(b); whether the zero-rating provisions for ships under VATA 1994 were intended to implement art. 15(5) of the sixth directive; and whether, on the basis of the sixth directive, the only conclusion was that the vessel was not zero-rated.

Decision

Sir Andrew Park, sitting as a High Court judge, dismissed the appeal, holding that, on the facts, the tribunal was correct to conclude that the vessel fell within the exemption in VATA 1994, s. 1(1)(b) considered independently of the sixth directive. The vessel fulfilled the gross tonnage requirement and was clearly not designed for recreation or pleasure. Further, it could not be said that the Grp. 8, item 1 zero-rating provision had been introduced to give effect to art. 15(5) of sixth directive. The UK provision was introduced by the Finance Act 1972 at a time when the sixth directive did not exist. From 1972 to 1977 it would have been impossible to construe it so as to be compatible with art. 15(5) because that sub-article did not exist.

Moreover, it was not seriously arguable that, although the UK provision was not introduced to give effect to art. 15(5), nevertheless once art. 15(5) came into existence and took effect at the beginning of 1978, the UK provision somehow acquired a new status, needing to be regarded as existing only to give effect in UK domestic law to art. 15(5) and now requiring to be construed, so far as possible, so as to produce the exact effect required by art. 15(5) no less and no more. If by its pre-existing terms it already covered the area to which art. 15(5) was directed, but covered other matters as well, there was absolutely no reason why it should not continue to cover those other matters.

While the court accepted the principle of compatible construction, of which the foremost application was that domestic statutes enacted to give effect to a directive should, as far as possible, be construed so as to achieve what the directive sought to have achieved and that they should also be construed, as far as possible, so as not to produce effects which would be contrary to those intended by the directive, there was no scope for those considerations to impact on the construction of the Grp. 8, item 1 zero-rating provision. The provision was not enacted to give effect to the sixth directive or to any of the provisions which the directive contained.

When the sixth directive came into effect, it also contained art. 28(2) which specifically permitted the UK to keep its existing zero-rating provisions in force (and conferred similar permissions for other member states), and it made no difference whether or not any of the preserved zero-rating provisions would have been inconsistent with some other article of the directive (like art. 15(5)). In those circumstances, Customs' argument was fatally undermined. The present case was one of simply maintaining in national legislation a historic zero-rated provision, namely Grp. 8, item 1 which traced back to the Finance Act 1972 and had not been altered in any material respect since. Therefore the principle of compatible construction did not apply. The provision did not have to be construed so as (if possible) to produce results consistent with art. 15(5). Rather, it could receive its natural construction uninfluenced by art. 15(5) (R & C Commrs v EB Central Services Ltd [2008] EWCA 486 distinguished).

In any case, even if the compatibility with Community law of the Grp. 8, item 1 zero-rating (or indeed of any other relieving provision contained in the UK's own domestic statute) might now be questioned, there was no doubt that, as long as it remained in the national statute, taxpayers could rely on it. If the EC Commission considered that an exemption or other relieving provision in a member state's national law was not permitted by the directive, the Commission might call on the member state to remove it, and if the member state declined the Commission could commence proceedings against it in the ECJ. But unless and until the offending provision was removed from the national law it remained in force, and taxpayers in the member state could take advantage of it.

It was of some significance that, when the sixth directive took effect, the statutory predecessor of the Grp. 8, item 1 zero-rating provision contained in FA 1972 was left totally unchanged. The absence of any change to the Grp. 8, item 1 zero-rating provision clearly showed that the intention was that it should continue to operate in future in the same way as it had in the past (as art. 28(2) permitted); it should continue to be construed in accordance with its natural meaning; and it should not be construed restrictively and unnaturally so as only to produce results which would coincide exactly with art. 15(5) of the directive.

Chancery Division.

Judgment delivered 5 June 2008.