HM Revenue & Customs v Prince Karunaraina Samarappulli Arachchige

Domestic VAT legislation must, so far as possible, be interpreted consistently with the Sixth Directive and the EU principle of avoiding non-taxation. Where a voucher represents a right to telecommunications services, the place of supply of that right may be identified by reference to the place of supply of the voucher itself, rather than only by first identifying the place of the underlying services. This construction is available where necessary to prevent a taxable supply escaping VAT. The court may adopt a less obvious meaning of the statutory language without adding words. The principle applies even where the conforming interpretation has an adverse effect on the taxpayer.

The respondent operated a shop and bought and sold prepaid telephone cards. The VAT and Duties Tribunal held that some supplies were outside the scope of UK VAT because the underlying telecommunications providers belonged in other EU member states. HMRC appealed, arguing that the respondent’s supplies took place in the United Kingdom and that the Tribunal’s approach created non-taxation and conflicted with the Court of Appeal’s decision in Revenue and Customs Commissioners v IDT Card Services Ireland Ltd [2006] STC 1252.

The central issue was the proper construction of article 21(1) of the Value Added Tax (Place of Supply of Services) Order 1992, read with the domestic VAT legislation and the Sixth Directive.

1. Appeal allowed. The Tribunal’s decision was inconsistent with the principle of avoiding non-taxation and undermined the binding reasoning in Revenue and Customs Commissioners v IDT Card Services Ireland Ltd [2006] STC 1252.
2. Article 21(1) stated that the place of supply of a right to services was the same as the place of supply of the services to which the right related. The wording permitted either place to be identified first. The Tribunal erred by treating the place of the underlying telecommunications services as necessarily requiring the place of supply of the phone cards to follow it.
3. The court was required to construe domestic legislation, so far as possible, in conformity with the Sixth Directive and the EU principle of avoiding non-taxation. That obligation could justify giving the statutory language a less obvious meaning, without adding words, where necessary to prevent a taxable supply escaping VAT.
4. On the ordinary facts, the phone cards were supplied by the respondent in West Hendon Broadway. Treating the place of supply of the cards as the United Kingdom and equating it with the place of supply of the related right to services avoided non-taxation. The same result followed from treating the supply of a phone card as itself a supply of telecommunications services.
5. The Tribunal should have considered the principles in IDT before construing article 21, rather than treating that decision as an additional issue after reaching its conclusion. The principle against direct effect of directives, discussed in Marshall v Southampton and South West Hampshire Area Health Authority [1986] 1 QB 401, did not prevent the conforming construction because the United Kingdom had transposed the Directive into domestic law.

• High Court (Chancery Division): allowed HMRC’s appeal from the VAT and Duties Tribunal. The Tribunal’s conclusion that certain supplies were outside the scope of UK VAT was rejected.