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A New Interpretation

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									VAT CASE




 A New
 Interpretation
 T                                              Peter Mantle barrister, Monckton Chambers, considers a robust new
        he recent decision by the Court of             Mantle,
        Appeal in the IDT Card Services
        case, 1 concerning VAT on the           approach by the Court of Appeal to the interpretation of VAT
 distribution in the UK of phonecards           legislation following the IDT Card Services case
 (entitling holders to services from a
 telecoms supplier established in the
 Republic of Ireland) resolved ‘a point of
 novelty and difficulty’ in the area of face-   deciding the case, the Court (CA)            was non-taxation of some telecoms
 value vouchers (and telecom-                   considered it necessary to read words        services as a result of the use of face-
 munications). It also raises a question as     into VATA 1994, if it was to be brought      value vouchers and differences of
 to the likelihood of an increase in            into conformity with the Sixth Directive,    approach in Irish and UK domestic law.
 judicial activism, using a more robust         and concluded that it was appropriate so     It is understood that a number of
 purposive approach to construction in          to do. The outcome was, as most readers      companies had incurred expense in
 VAT cases, whenever the judges consider        will know, that UK distributors of the       structuring their businesses to exploit the
 it required. That means an approach            phonecards were held liable to pay VAT       tax advantage they perceived as open to
 based on (judicial understanding of) ‘the      on the issue of those phonecards to them     them.
 purposes of the Sixth Directive’.              on the basis that they received a supply         The cards in issue were multi-
     The judgment of Arden LJ, with             of telecoms services in the UK where         functional, but that complication can be
 whom the other judges agreed,                  they were established (a face-value          largely overlooked and for simplicity I
 recognises in the flexible and robust          voucher representing a promise to make       shall describe them as phonecards.
 interpretative techniques now used by          telecoms services available). From the       ICSIL, based in Ireland, issued
 the courts ‘to make legislation                traders’ point of view, and probably the     phonecards to distributors based in the
 compatible with the ECHR’ techniques           CA’s own, the CA filled a gap in VATA        UK. They resold them to members of
                                                                                             the public in the UK, who used them to
                                                                                             obtain telecoms services from Indirect,
                                                                                             based in Ireland and part of the same
                                                                                             group as ICSIL. No VAT was payable
‘... the Courts may be obliged to read [domestic] legislation as                             in Ireland when the phonecards were
containing a measure which the legislature ought to have made under                          supplied to businesses, such as the
                                                                                             distributors, outside Ireland, or when
Community law but failed so to do.’                                                          the phonecards were redeemed, even if
                                                                                             the telecoms services were supplied in
                                                                                             Ireland and the end-user received his
                                                                                             supply from a distributor outside
 equally appropriate ‘to make domestic          to the disadvantage of phonecard             Ireland who received his cards from an
 legislation comply with the laws of the        distributors as taxpayers.                   Irish issuer. It was crucial to the dispute
 European Union’. As Arden LJ has since            The specific statutory provisions that    that Indirect did not issue the voucher.
 put it, ‘The very basis of the technique       had to be construed and the facts of the     Therefore it was a credit voucher and
 is that the Courts may be obliged to read      case may appear to be of little general      in UK VATA Schedule 10A, paragraph
 [domestic] legislation as containing a         importance, in comparison with the more      3 was relevant. VATA, Schedule 10A,
 measure which the legislature ought to         general principles of approach to            paragraph 3(2), apparently crucially,
 have made under Community law but              interpretation of VAT statutes laid out by   required that for the purposes of VATA
 failed so to do.’ 2 In IDT the Court           the Court. However, in order to gauge        the consideration for any supply of a
 concluded that the ‘principle of               how radical this development is it is        credit voucher be disregarded (unless
 conforming interpretation’ meant that          necessary to have a grasp of the facts and   it exceeded the face value, not the case
 the court might be obliged to write words      the relevance of VATA, Schedule 10A,         here). Those plain words were subject
 into a tax statute, although that did not      paragraph 3, which concerns the              to disapplication, but according to the
 mean that the court was subject to the         treatment of credit vouchers. The case       words of paragraph 3(3) only ‘[where
 discipline of having to identify exactly       involved cross-border supplies. The          goods and services are obtained through
 what words should be written in. In            traders’ view of VATA meant that there       the credit voucher] from a person other


16 THE TAX JOURNAL                                                                                  Monday, 27 February 2006
                                                                                                                        VAT CASE


than the issuer and that person fails to                                                    lay the EC law foundations for its bold
account for any VAT due on the supply                                                       interpretation. A reference to the ECJ
of those goods or services to the person                                                    was considered unnecessary. However,
using the voucher to obtain them’.                                                          there was at least incomplete
HMRC took the view that UK                                                                  harmonisation at the Sixth Directive
distributors of the phonecards were                                                         level, and scope for different Irish and
liable to account f or VAT on the                                                           UK approaches to the Directive, but that
supplies of phonecards to them by                                                           proved no deterrent to the robust
ICSIL.                                                                                      approach.
    The CA held that paragraph 3(3)                                                             Although Article 9 featured
could and should be interpreted to be                                                       prominently in the submissions and
compatible with general principles of the                                                   reasoning, this was not a case where the
Sixth Directive. As a result, the disregard                                                 interpretative exercise can be seen as
in paragraph 3(2) is to be disapplied,                                                      predominantly directed to ensuring that
whenever the disregard would result in                                                      the specific provisions of a directive
non-taxation, contrary to the objectives                                                    article are implemented by domestic
of the Sixth Directive, of a taxable                                                        legislation. The approach to the issues
supply of goods or services in the UK.                                                      adopted treats the place of supply rules
That included supplies to distributors                                                      as a potential exclusion from reliance on
where the supply of telecoms by Indirect                                                    more general principles of the Sixth
was not liable to VAT under Irish law.        Peter Mantle                                  Directive. In reaching its conclusions,
The CA was not constrained in its                                                           the CA found Article 9 no obstacle, but
approach because;                             Arden LJ’s comments reveal that she           its primary concern appears to be the
   there was no indication that Parliament    was clearly prepared to use the principle     possible violation of principles of non-
had specifically intended to depart from      of conforming interpretation to depart        taxation, the avoidance of double
the Sixth Directive on this particular        from the otherwise ‘correct’                  taxation, the prevention of distortion of
point;                                        interpretation of VATA.                       competition and neutrality. That
   there was no fundamental feature in            In terms of this particular application   contributes to giving the judgments a
Schedule 10A inconsistent with reading        of the robust approach, the Court found       radical appearance. This was not a robust
into it a further disapplication to           it necessary and permissible to apply it      interpretation in the face of the demands
conform to the Sixth Directive; and           in a case where the trader had argued that    of particular articles of the Directive, but
   the effect of the robust interpretation    there was no Sixth Directive obligation       principally reliant on recitals and general
did not raise policy issues beyond those      on the UK to apply VAT, and many              principles, well recognised in the
a court could properly resolve in its         others, including Moses J below, had          jurisprudence of the ECJ, but liable to
judicial role.                                agreed.3 Of course, it should not have        take courts in altogether less certain
    The principle it applied has been         mattered to the CA whether the                directions.
described as that of ‘conforming              application of the Sixth Directive to the         The CA, whilst concerned with the
interpretation’ and Arden LJ has even         situation it was concerned with was           principle of legal certainty, ultimately
described it simply as the Marleasing
principle, well known as that is, but in
my view it is at least an enhanced
principle, and one that brings features
that most tax practitioners would be
                                                     For taxpayers, a more robust approach to a conforming
surprised to encounter. Words can be                 interpretation may simply be the alternative means to an end they
written into a UK statute, indeed it can
be interpreted against its natural meaning           can already attain and give them no additional benefit
and there is no need to find a simple
linguistic device for this. The approach
draws heavily on human rights cases,
especially the House of Lords in              controversial, as opposed to whether it       allowed it no significant impact in this
Ghaidan v Godin-Mendoza [2004] 2 AC           applied or not. Moreover, the Court           case. More difficult cases may see it
557.                                          importantly recognised that it was            feature more prominently.
    Six features of the robust application    engaged on two levels of interpretation.         It is notable that in a great many cases
of the principle of conforming                The first was at the level of the Sixth       where the Sixth Directive is of relevance
interpretation in this case should be         Directive, the second was at the level of     to a dispute the taxpayer will already
remarked upon. It undoubtedly seems           VATA 1994. The Court described the            have a directly effective EC law right. It
to be the case that the approach to           first as a ‘greater burden’, a result of EU   can rely on that right, in effect,
interpretation adopted in this case led       legislation worked out in less detail, and    regardless        of     the      domestic
to taxpayers being held liable to pay         implicit within that burden is more scope     ‘implementing’ provisions. Thus for
VAT where, but for that robust                for differences of opinion and for            taxpayers, a more robust approach to a
approach, they would not have been. A         judicial opinion to impact on the law.        conforming interpretation may simply be
traditionalist could only see it as a         The CA considered that Moses J had            the alternative means to an end they can
judicial technique that effectively           approached Article 9 of the Sixth             already attain and give them no
created a liability to tax (in the UK).       Directive wrongly and it was careful to       additional benefit. Indeed, a taxpayer


Monday, 27 February 2006                                                                                THE TAX JOURNAL 17
VAT CASE


 may conceivably be better placed, in          although in other respects Pill LJ may          long-term discernable trend to more
 terms of remedies, if there has not been      be seen as more conservative than the           adventurous interpretation of VAT
 proper implementation in domestic             other judges.                                   provisions by reference to EU law on the
 legislation. Of course, where a taxpayer          Indeed, in terms of the wider               basis of a Marleasing-type approach, and
 does not have a directly effective right      application of the approach to                  a more robust approach in human rights
 the more robust approach could work to        interpretation used by the CA, the              cases, which were inevitably going to
 its advantage, depending on the degree        judgments contain one firm hint of              exercise some influence on cases
 of intervention the courts will be            hesitation. Pill LJ acknowledging that          involving other international and EU
 prepared to undertake in the absence of       the approach adopted involved the use           obligations. What is noteworthy is that
 a directly effective right. As remarked       of robust techniques, concluded that they       whilst refusing to admit the possibility of
 above, this decision is not particularly      were justified ‘in the particular               the particular interpretation adopted by
 closely tied to a particular article.         circumstances of this case, to which I          Arden LJ, in Fleming the majority do not
 Therefore, a more interventionist             would confine my comments’. Perhaps,            attempt to deny the applicability of the
 approach to statutory construction may        for him, one factor was that it seemed to       approach to interpretation adopted in IDT
 on occasion, favour the taxpayer.             him an obvious case.                            in the VAT context.
 However, as this case itself                      Anyone who thought the CA might not             The Court of Appeal has in the recent
 demonstrates, it is likely to be a tool of    immediately find occasion to return to          past been keen to adopt, in various VAT
 greater significance to HMRC where, at        such a robust approach to interpretation        matters, a purposive approach to
 first sight, domestic legislation fails to    in the VAT context has already been             interpretation, but a measured approach
 place obligations on taxpayers that can       proved wrong. Readers of tax case news          to the use of general principles
 be spelled out of the Sixth Directive.        in the last issue will already know that        underlying the Sixth Directive. For
 This is in marked contrast to the impact      the taxpayer has won its appeal in the          example, it has rejected the notion that
 of robust statutory interpretation            latest decision on the three-year cap.          Article 13B exemptions are to be
 involving human rights on the                 Fleming is highly significant in terms of       interpreted in ‘a rigid and formulaic
 relationship between the subject and the      the cap. What this article can point out is     way’, because exceptions to ‘the general
 state.                                        that in giving effect to EC rights,             principle that [VAT] is to be levied on
     The crucial paragraph 3(3) of             threatened by the imposition of the cap,        all services supplied for consideration by
 Schedule 10A was described as granting        Arden LJ adopted the enhanced IDT               a taxable person’. Rather, in the field of
                                                                                               exemptions the Court has looked to
                                                                                               context and to other principles, for
                                                                                               example securing equal treatment for
It should serve as a reminder that it is not in every case that the IDT                        taxable persons, as has the ECJ, as
                                                                                               opposed to over-heavy reliance on the
enhanced principle of compliant construction will come into play, or                           principle that, exceptions aside, VAT
                                                                                               should be levied on all transactions. On
that the principle will always have radical effects
                                                                                               its face at least, this is a somewhat more
                                                                                               sensitive approach, which operates on
                                                                                               both levels of interpretation. It should
 relief to a supplier from double taxation,    principle of conforming interpretation in       serve as a reminder that it is not in every
 probably a fair description, and one          relation to a UK court’s ability to read a      case that the IDT enhanced principle of
 accepted by CA. Although the end result       transitional period into national               compliant construction will come into
 is the same in each case, it may be easier    legislation. In reliance on it she concluded    play, or that the principle will always
 for this purposive approach to spell out      that a transitional period could be read        have radical effects. However, subject to
 an obligation to pay VAT by reading           into Regulation 29(1A). However, the            the ultimate constraint, of not crossing
 something into an anti-double-taxation        other judges disagreed with her on that.        the line, re-emphasised in Fleming,
 provision, rather than by interpreting        As Hallet LJ put it, relying on Gaidan,         wherever that Rubicon may be, the IDT
 widely a primary provision imposing           ‘however strong and radical the obligation      approach is capable of producing what
 liability. That will especially be so where   on a court to interpret legislation, there is   may well prove radical interpretations
 difficult policy considerations occur.        a line that it may not cross’. Thus there is    with very significant consequences in the
 They may well arise at the margins of         a hint of the answer to the question as to      VAT field.
 VAT, but it is impossible to gauge what       the likelihood of an increase in judicial
 sort of a brake that will be on judicial      activism using this interpretative              Notes
                                                                                               1
 activism. On the bare facts of this case      principle. IDT has certainly sowed the            [2006] EWCA Civ 29, judgment of
 it may well have appeared to CA to be a       seeds but it may take particular cases for      27 January 2006, Pill, Latham, Arden
 clear case where telecoms services that       the enhanced principle to take root and         LJJ. Arden LJ gave the leading judgment
 should have been taxed somewhere in the       other judges may be more willing to see         with which Latham LJ simply agreed.
 EC were going untaxed altogether.             the constraint that they must only interpret    Pill LJ gave a concurring judgment.
                                                                                               2
 Taxation in the UK did not appear to risk     domestic legislation to give proper effect        Fleming v HMRC [2006] EWCA Civ
 double taxation. Pill LJ thought the          to EC rights ‘so far as is possible’ as a       70, judgment of 15 February 2006,
 demands of EC law were strong and             stricter restraint. How significant the         Ward, Arden, Hallet L.JJ.
                                                                                               3
 spoke of a ‘fundamental duty arising          impact will be depends in part on how             Moses J had found any principle
 from EU directives to impose VAT on           radical a departure IDT is seen to be. It       empowering or requiring the UK to
 the supply of services’. To taxpayers that    would go too far to say that it represents      charge VAT absent, the place of supply
 must give some cause for alarm,               a fundamental shift, as it follows in a         being Ireland under Article 9(1).


18 THE TAX JOURNAL                                                                                    Monday, 27 February 2006

								
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