Revenue and Customs v IDT Card Services Ireland Ltd

Domestic legislation implementing an EU directive must, so far as possible, be interpreted in the light of the directive’s wording and purpose. The court may read in words and depart from an otherwise unambiguous meaning, provided the resulting construction does not contradict a fundamental feature of the legislation or require policy choices unsuitable for judicial determination.

The Sixth EC VAT Directive (77/338/EC) embodied general principles against non-taxation, double taxation and distortion of competition. A cross-border arrangement could not exploit different lawful national methods of charging VAT so that a taxable supply of telecommunications services escaped VAT altogether. Accordingly, the disregard for consideration for credit vouchers in paragraph 3(2) of Schedule 10A had to be read subject to a further disapplication where it would otherwise produce non-taxation contrary to those objectives.

An Irish issuer supplied multi-functional phonecards to United Kingdom distributors. The cards could be redeemed either for sports information from a United Kingdom supplier or for telecommunications services from an Irish supplier. Ireland treated the issue of the cards as the relevant taxable event, while United Kingdom law ordinarily taxed the services on redemption.

Customs & Excise decided that the United Kingdom distributors had to account for VAT where the Irish telecommunications supplier did not do so. Moses J allowed the issuer’s judicial-review claim, holding that the United Kingdom could not impose VAT in those circumstances.

The appeal concerned whether paragraph 3(3) of Schedule 10A to the Value Added Tax Act 1994 could, consistently with the Sixth EC VAT Directive (77/338/EC), be interpreted to prevent the cross-border supply chain from being wholly free of VAT.

1. Appeal allowed unanimously. The court set aside Moses J’s conclusion and dismissed the respondent’s notice. The United Kingdom distributors’ supply of the phonecards could be subjected to VAT.

2. The Sixth EC VAT Directive (77/338/EC) contained general principles requiring the avoidance of non-taxation and double taxation, and the prevention of distortion of competition. Those principles applied to the harmonised supply of telecommunications services. If neither the issue of the cards nor the subsequent provision of telecommunications services bore VAT, there was non-taxation and a competitive advantage over other suppliers.

3. The relevant supply was the supply of cards to United Kingdom taxable distributors, rather than the Irish supplier’s provision to end-users. The card was, to the extent used for telecommunications, a promise to provide or procure telecommunications services. It therefore fell within article 9(2)(e), whose specific place-of-supply rule took priority over the residual rule in article 9(1). The place of that supply was the United Kingdom.

4. Per Arden LJ, with whom Latham LJ agreed and whose reasoning Pill LJ substantially adopted, the Marleasing principle required a conforming construction of domestic legislation. The court could use the robust interpretative techniques described in Ghaidan v Godin-Mendoza [2004] 2 AC 557, including reading in words, but could not depart from a fundamental feature of the legislation or make legislative policy choices.

5. Paragraph 3(3) of Schedule 10A could be read to widen the disapplication of the paragraph 3(2) disregard. The disregard did not apply where it would cause the non-taxation, contrary to the Directive’s objectives, of a taxable supply of goods or services in the United Kingdom. That construction went with the grain of the Schedule, which already contemplated disapplying the disregard where VAT due on redemption was not accounted for. Legal certainty did not prevent that construction.

• Court of Appeal (Civil Division): Allowed Customs & Excise’s appeal and dismissed the respondent’s notice: [2006] EWCA Civ 29.
• High Court, Queen’s Bench Division: Moses J allowed the respondent’s application for judicial review by an order dated 21 December 2004. No citation was stated in the judgment.