Revenue and Customs v Isle of Wight Council & Ors

Where the correct interpretation of a directly effective Community tax provision is necessary to determine an appeal, and existing guidance is insufficiently clear, the appellate court should refer the material questions to the Court of Justice before deciding whether the tribunal below erred.

Article 4.5 of the Sixth Council Directive raises distinct questions concerning the geographical or personal scope of the competition inquiry, the meaning of “would lead to”, and the threshold represented by “significant distortions of competition”. Those questions cannot safely be resolved by assuming that fiscal neutrality supplies the answer.

The Commissioners appealed against a decision of the VAT and Duties Tribunal dated 23 January 2006 concerning four local authorities’ off-street car-parking activities. The tribunal held that the economic inquiry under article 4.5(2) of the Sixth Council Directive of 17 May 1977 (77/388/EEC) was to be conducted authority by authority, by reference to the relevant local market, and concluded that the exemptions would not cause significant distortions of competition.

The Commissioners argued for a nationwide inquiry based on classes of activity. They also challenged the tribunal’s interpretation of “would lead to” and “significant distortions of competition”. The central issue was whether the appeal could properly be determined without authoritative clarification from the ECJ.

1. Reference to the ECJ. The appeal was not finally determined. The court held that three questions of Community law required authoritative clarification before it could assess the tribunal’s conclusions: (i) whether article 4.5 required an “activities” inquiry or a “taxable person by taxable person” inquiry; (ii) the meaning of “would lead to”; and (iii) the meaning of “significant distortions of competition”.
2. Article 4.5 had direct effect according to Carpaneto No.1 [1991] STC 205. That decision, together with Porto [2001] STC 560, provided arguments on both sides of the dispute but did not give sufficiently clear guidance on the practical scope of the inquiry.
3. The court declined to treat fiscal neutrality as decisive. Article 4.5(1) deliberately exempts public authorities in defined circumstances, while article 4.5(2) removes the exemption only where its continuation would lead to significant distortions of competition. The existence of different VAT treatment between public and private operators therefore did not itself answer the statutory question.
4. The court regarded the reasoning of the Advocate General in Waterschap [2005] STC 1298 as stating a general principle, namely that the distortions engaging article 4.5(2) must be exceptional compared with the normal consequences of the public authority’s non-taxable status. However, the Commissioners were entitled to argue that the later opinion in Hutchison 3G UK Ltd and Others Case C-369/04 adopted a materially different approach.
5. Given the potentially far-reaching consequences of either interpretation, and the lack of clear and unequivocal Community guidance, the questions should be referred before deciding whether the tribunal’s decision was legally or factually sustainable. Counsel were invited to agree the form of the questions.

• VAT and Duties Tribunal: By decision dated 23 January 2006, the tribunal treated the article 4.5(2) inquiry as authority-specific and allowed the respondent authorities’ exemptions.
• High Court (Chancery Division): The court declined to determine the merits of the Commissioners’ appeal at that stage and directed that questions of Community law be referred to the ECJ.