Customs and Excise v Isle of Wight Council

Where domestic VAT legislation does not properly implement the public-authority exemption in article 4.5 of the Sixth Directive, a local authority may rely directly on the whole provision against the Commissioners, provided the conditions for direct effect are met. The exemption in article 4.5(1) cannot be treated in isolation from the competition qualification in article 4.5(2). The tribunal must therefore determine whether treating the authority as non-taxable would create significant distortions of competition. The Marleasing principle requires conforming interpretation only so far as interpretation remains possible. It does not authorise the court to create an entirely new charging regime by substantially rewriting clear domestic provisions.

The Commissioners appealed from a decision of the VAT and Duties Tribunal concerning the Council’s claim under section 80 of the Value Added Tax Act 1994 for repayment of VAT charged on off-street parking facilities.

The Tribunal had decided the special legal régime issue in the Council’s favour but had not decided whether the second paragraph of article 4.5 of the Sixth Directive had been implemented in domestic law. The appeal concerned whether the domestic legislation could be interpreted consistently with the Directive under the Marleasing principle and, if not, whether article 4.5 had direct effect between the Council and the Commissioners.

1. Appeal allowed. The Tribunal was required to investigate the competition and overpayment issues, including whether treating the Council as non-taxable would lead to significant distortions of competition.

2. The domestic scheme was materially different from article 4.5. Sections 3, 4 and 42 of the Value Added Tax Act 1994 generally made local authorities liable to VAT on taxable supplies made in the course of business, without qualification by reference to their public-authority status or the effect on competition.

3. The Marleasing principle requires domestic law to be interpreted, so far as possible, in the light of the wording and purpose of an applicable directive. It may require the court to read words into legislation or disregard offending words. The limit is reached where the proposed changes would replace a deliberate legislative scheme with an entirely new charging régime. The suggested rewriting of the definition of business in section 94 went beyond permissible interpretation.

4. Article 4.5 was unconditional and sufficiently precise to have direct effect. Carpaneto was binding authority that a public-law body could rely on article 4.5 against an inconsistent national provision. The competition condition was a conditional limitation requiring an assessment of economic circumstances, but that assessment remained subject to judicial review.

5. The Council could rely on article 4.5(1) without accepting that it was necessarily taxable under article 4.5(2). The two provisions operate together, but article 4.5(2) did not prevent direct reliance on the exemption. The Tribunal therefore had to determine whether the Council’s non-taxable treatment was liable to cause a significant distortion of competition.

• VAT and Duties Tribunal: decision dated 6 April 2004. The Tribunal decided the special legal régime issue for the Council and left the implementation issue unresolved in favour of determining it on appeal.
• High Court (Chancery Division): appeal allowed. The Tribunal was directed to proceed to the factual investigation required by the competition and overpayment issues.