HM Revenue and Customs v Isle of Wight Council & Ors

For the purposes of article 4.5(2) of the Sixth Directive, the risk of competition distortion must be assessed by reference to the activity as such, rather than by examining individual local markets. The relevant distortion may arise from actual or potential competition, but potential competition must be real and not purely hypothetical. The word significant means more than negligible. The scale of an activity exceeding a negligible level does not create an automatic presumption that the activity causes significant distortion. The issue requires a factual investigation.

Four local authorities appealed against a decision of the Value Added Tax and Duties Tribunal dated 23 January 2006, reported as [2006] UK VAT V19427. They sought repayment of VAT paid on revenue from off-street car-parking facilities. The tribunal had upheld their appeals, adopting a local-authority-by-local-authority approach to competition and concluding that significant distortion required an exceptional distortive effect.

On an earlier appeal, the court referred questions concerning article 4.5 of the Sixth Directive to the ECJ. After receiving its answers, the central issue was whether the High Court could determine the substantive VAT question itself or should remit the appeals to the tribunal.

1. The appeal was allowed and the tribunal’s orders were set aside. The local authorities’ appeals were remitted to the tribunal for rehearing.

2. Article 4.5(2) requires an assessment by reference to the activity in question as such, without restricting the inquiry to any particular local market. The relevant question is whether treating public authorities as non-taxable persons would lead to actual or potential distortions of competition.

3. Potential competition is relevant, but the possibility of market entry must be real and supported by facts, objective evidence or market analysis. A purely theoretical possibility is insufficient.

4. Actual or potential distortion must be more than negligible before it is significant. The reasoning concerning the presumption applicable to Annex D activities under article 4.5(3) did not create a corresponding presumption under article 4.5(2). The scale of an article 4.5(2) activity being more than negligible does not automatically make the public authority taxable.

5. The article 4.5(2) issue therefore required a factual investigation. Neither the tribunal nor the ECJ had found facts enabling the court to decide that the four authorities’ activities caused more than negligible distortion, and the matter was appropriately remitted.

6. The court declined to prescribe a methodology for the nationwide activities-based inquiry, leaving the parties and tribunal to consider the necessary evidence and directions.

1. High Court (Chancery Division): The tribunal’s decision dated 23 January 2006, [2006] UK VAT V19427, was appealed to the High Court. The High Court referred questions on article 4.5 of the Sixth Directive to the ECJ.
2. High Court (Chancery Division): Following the ECJ’s answers, the appeal was allowed, the tribunal’s orders were set aside, and the local authorities’ appeals were remitted for rehearing.