HM Revenue & Customs v Lt Cmdr Colin Stone

A pre-existing domestic VAT zero-rating provision preserved by the transitional derogation in article 28.2 of the Sixth Directive remains effective according to its natural meaning. It need not be reconstructed so as to match the narrower terms of article 15.5 merely because both provisions concern vessels. The principle of compatible construction does not require a historic zero-rating to be interpreted restrictively where it was enacted before the Directive and was subsequently maintained unchanged. A vessel designed as a permanent home, with ancillary business use, is not thereby designed for recreation or pleasure. A taxpayer may rely on a relieving provision while it remains in domestic legislation.

HMRC appealed from a decision of the VAT and Duties Tribunal allowing Commander Stone’s appeal. He had imported The Kei, a newly built replica Dutch barge, from the Netherlands. The vessel exceeded 15 tons and was designed principally as a permanent home, with some business use as a marine surveyor.

The issue was whether the importation was zero-rated under Group 8 item 1 of Schedule 8 to the Value Added Tax Act 1994. HMRC contended that the domestic provision had to be construed consistently with article 15.5 of the Sixth Directive, under which the vessel would not qualify. The central question was whether article 15.5 affected the construction of the historic domestic zero-rating, or whether article 28.2 preserved it according to its domestic terms.

Appeal dismissed. The tribunal had reached the correct result, although the reasoning was elaborated.

1. Domestic provision. Under section 30(3) and Schedule 8 Group 8 item 1 of the Value Added Tax Act 1994, a qualifying ship was one of at least 15 tons which was neither designed nor adapted for recreation or pleasure. The Kei satisfied the tonnage requirement. It had been designed from the outset as a home, with some business use, and not for recreation or pleasure. The distinction between a vessel designed for recreation and one later adapted for that use was material.
2. Natural meaning. The ordinary meaning of recreation or pleasure did not include use as a permanent home. The heading Transport and the existence of a separate houseboat category did not restrict clear wording in Group 8. Piddington v Co-operative Insurance Society Ltd [1934] 2 KB 236 did not establish that every non-business use was a use for pleasure.
3. Compatible construction. The principle described in Marleasing SA v La Comercial Internacional de Alimentacion SA Case C-106/89, [1990] ECR I-4135 requires national legislation to be construed, so far as possible, compatibly with a Directive. It permits strain in interpretation but does not authorise a construction which the statutory language cannot bear.
4. Article 28.2. The domestic zero-rating originated in the Finance Act 1972, before article 15.5 existed. It was maintained when the Sixth Directive took effect and fell within article 28.2. That provision preserved historic zero-ratings; it did not convert them into domestic implementations of article 15.5. The domestic provision therefore remained effective according to its natural meaning.
5. Comparison with later amendments. HMRC v EB Central Services Ltd [2008] EWCA 486 concerned later extensions of zero-rating and was materially different. It supported, rather than contradicted, the distinction between historic provisions maintained under article 28.2 and later provisions enacted to implement the Directive.
6. Continuing effect. Even if Community-law compatibility were questioned, the domestic provision continued to bind taxpayers until repealed or amended. No separate political decision to maintain the particular zero-rating had to be proved.

There was accordingly no VAT liability on the importation of The Kei.

1. High Court (Chancery Division) — HMRC’s appeal from the tribunal was dismissed.
2. VAT and Duties Tribunal — The tribunal allowed Commander Stone’s appeal and found the imported vessel entitled to zero-rating.