Isle of Wight Council & Ors v HM Revenue and Customs

For the purposes of Article 4.5(2) of the Sixth Council Directive, a local authority may take the cost of providing off-street car parking into account when setting charges. That consideration is not confined to preventing unlawful trading or raising general revenue, nor is it merely a final adjustment after other policy factors. The relevant comparison is with a hypothetical world in which VAT had never been imposed, while spending priorities remain unchanged. A tribunal may infer that non-taxation would lower charges over time. If a supplier can charge less because of special tax treatment, the resulting distortion of competition may be significant. Appellate courts should not disturb such fact-based inferences unless they are plainly wrong or outside the range of reasonable disagreement.

Four local authorities appealed against the Upper Tribunal’s dismissal of their appeals concerning claims under section 80 of the Value Added Tax Act 1994 for repayment of VAT charged on off-street car parking. The First-tier Tribunal had dismissed the claims, and the Upper Tribunal upheld that decision in [2014] UKUT 0446 (TCC). The First-tier Tribunal’s decision was reported at [2013] SFTD 442.

The appeal alleged errors of law concerning the statutory framework governing local-authority parking charges, the relevance of the general fund, and the causal connection between non-taxation and competition. The central issue was whether treating local authorities as non-taxable persons would lead to significant distortions of competition under Article 4.5(2) of the Sixth Council Directive.

The Court of Appeal unanimously dismissed the appeal. The Chancellor gave the judgment, with which Lord Justice Underhill and Lord Justice David Richards agreed.

1. Applicable test. The Article 4.5(2) inquiry concerned the activity of off-street car parking as a whole. It included real potential competition and required a distortion more than negligible. The appeal therefore turned on whether the tribunals had made an error of law in evaluating the likely effects of non-taxation.
2. Relevance of cost. The cost of providing off-street car parking was not legally confined to preventing unlawful trading or raising general revenue. When exercising powers and duties under the Road Traffic Regulation Act 1984, local authorities could lawfully have regard to the overall constraint of meeting the cost of providing parking. Charges could exceed cost for particular traffic-management or policy purposes, but cost remained a legitimate consideration.
3. Hypothetical comparison. The correct comparison was with a world in which VAT had never been payable, not with an existing budget from which a VAT liability had suddenly disappeared. The First-tier Tribunal was entitled to infer that the same spending priorities and general-fund allocation would remain, while the absence of VAT would reduce upward pressure on charges and permit lower charges over time.
4. Appellate restraint. The relevant question was whether the First-tier Tribunal had erred in law in the light of its legitimate factual findings. Its inferences were supported by extensive evidence and were not plainly wrong or outside the range of reasonable disagreement: HMRC v Proctor & Gamble UK [2009] EWCA Civ 407; Assicurazioni Generali Spa v Arab Insurance Group [2002] EWCA Civ 1642, [2003] 1 WLR 577.
5. Competition and outsourcing. The pricing findings were sufficient. If one supplier could charge less over time because of its special tax status, competition was likely to be significantly distorted. The First-tier Tribunal had also found a distortion in outsourcing, but had not found that distortion significant by itself; the Upper Tribunal was wrong to suggest otherwise. The court did not need to decide whether parking charges could lawfully be used to raise income for other traffic-management purposes.

The appeal was dismissed.

• Court of Appeal (Civil Division). Appeal dismissed.
• Upper Tribunal (Tax and Chancery Chamber). Appeals from the First-tier Tribunal dismissed: [2014] UKUT 0446 (TCC).
• First-tier Tribunal. Appeals against HMRC’s rejection of VAT repayment claims dismissed; decision reported at [2013] SFTD 442.
• Earlier proceedings. A High Court appeal led to a reference to the European Court of Justice and subsequent remittal. The High Court decision was reported at [2007] EWHC 219 (Ch) and [2008] STC 614; the reference was Case C-28/07, reported at [2008] STC 2964 and [2009] STC 1096.