HM Revenue & Customs v EB Central Services Ltd

Domestic legislation intended to implement a VAT directive must, so far as possible, be construed compatibly with that directive. The court may supply or read down words where this accords with the legislation’s general scheme and does not alter a fundamental feature.

An exemption for services meeting the direct needs of aircraft or cargo requires services necessary to their operation. Landside storage of passengers’ luggage does not qualify before the luggage is checked in and consigned to the carrier. Nor is such storage directly connected with import or export. Transitional derogations permitting existing exemptions to be maintained cannot justify an expansion of those exemptions.

The taxpayers provided landside storage facilities for passengers’ personal luggage at three airports. They claimed that 95% of their supplies were zero-rated under Items 6(b) and 11(a) of Group 8 of Schedule 8 to the Value Added Tax Act 1994.

The VAT and Duties Tribunal allowed the claim in respect of 76% of the supplies. The Chancellor dismissed HMRC’s appeal and allowed the taxpayers’ cross-appeal, increasing the proportion to 95%. He held that the domestic provisions were referable to the transitional derogation in article 28 of the Sixth Directive and therefore did not require compatible construction with article 15.

HMRC appealed. The issues were whether the domestic provisions had to be construed consistently with articles 15(9) and 15(13), whether landside luggage storage came within those articles, and whether the domestic provisions could be construed compatibly with them.

1. The appeal was allowed unanimously. Mummery and Dyson LJJ delivered reasoned judgments, with each agreeing with the other. Lindsay J agreed and added observations concerning the strictness of the “direct needs” requirement.

2. The addition of storage to Item 6(b) was intended to implement the mandatory exemptions in article 15 of the Sixth Directive. It was not an exercise of the transitional derogation in article 28. The legislative history and preparatory materials showed that the amendment was made to bring domestic law into line with Community VAT law. Article 28 permitted existing national exemptions to be maintained. It did not permit their expansion.

3. Items 6(b) and 11(a) therefore had to be construed, so far as possible, consistently with articles 15(9) and 15(13). The compatible-construction obligation permitted the court to imply or read down words where that course was consistent with the general scheme of the legislation and did not depart from a fundamental feature. Differences in drafting technique or the scope of particular wording did not justify abandoning the obligation.

4. Article 15(9) imposed a strict requirement. Services meet the direct needs of aircraft or cargo only where they are necessary to their operation. Landside storage served passengers’ convenience. Passengers’ luggage did not acquire the characteristics of cargo until it was checked in and consigned to the carrier. Storage before that point met no direct need of the aircraft or its cargo.

5. For corresponding reasons, landside storage was not directly connected with the import or export of goods under article 15(13). The necessary connection arose when the luggage was checked in and placed in the carrier’s possession for transport.

6. Item 6(b) could be construed as incorporating the requirement that storage meet the direct needs of aircraft or cargo. Item 11(a) could likewise be read down to require a direct connection with the relevant import or export. The taxpayers’ supplies consequently fell outside both domestic exemptions.

1. Court of Appeal (Civil Division): HMRC’s appeal was allowed unanimously. The court held that the supplies fell outside Items 6(b) and 11(a) of Schedule 8 to the Value Added Tax Act 1994 when construed compatibly with the Sixth Directive: [2008] EWCA Civ 486.

2. High Court, Chancery Division: The Chancellor dismissed HMRC’s appeal and allowed the taxpayers’ cross-appeal. He held that 95% of the supplies were zero-rated. No neutral citation is stated.

3. VAT and Duties Tribunal: The Tribunal allowed the taxpayers’ appeal in part, holding in principle that 76% of their supplies were zero-rated.