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	England and Wales High Court (Administrative Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> Whistl UK Ltd, R (on the Application of) v HM Revenue and Customs & Anor [2014] EWHC 3480 (Admin) (23 October 2014) URL: http://www.bailii.org/ew/cases/EWHC/Admin/2014/3480.html Cite as: [2015] BVC 2, [2014] STI 3175, [2014] EWHC 3480 (Admin), [2015] STC 1077

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		23rd October 2014

The Honourable Mr Justice Kenneth Parker :

Introduction

1. On 10 December 2012 I granted permission to the Claimant to bring this claim against the Commissioners for Her Majesty's Revenue and Customs ('HMRC'). The Claimant was until recently TNT Post UK Limited ('TNT Post'). It is now Whistl UK Limited, but I believe it is convenient to use the former name in this judgment. TNT Post is a company incorporated in England. It is part of the Post NL Group, which is the universal postal provider in the Netherlands. The Post NL Group provides mail distribution services in the Netherlands, the United Kingdom, Germany and Italy and employs about 65,000 people. In the UK TNT Post provides postal distribution services for pre-sorted and unsorted bulk mail. At present its main business is the collection, sorting (for unsorted mail), procuring and delivering to Royal Mail regional depots of its customers' mail. These are known as 'upstream services'. 'Downstream services' are the final sorting, distribution to local delivery offices and final delivery of mail. Royal Mail Group provides such services to TNT Post, and other carriers, and directly to business customers, by giving access to its network ('access services'). Royal Mail Group provides its own end-to-end services, combining upstream and downstream services for its own customers. I describe these services more fully at paragraphs 38-47 below.
2. The issue raised by the claim is whether the exemption from Value Added Tax ('VAT') conferred by United Kingdom primary legislation in respect of the supply of regulated 'access services' by Royal Mail Group, the Interested Party, as a designated provider of universal postal services, is consistent with EU law. The resolution of this issue turns upon the correct interpretation of the judgment of the European Court of Justice in R(on the application of TNT Post UK Ltd) v Revenue and Customs Commissioners (case C-357/07) [2009] STC 1438 ('TNT').
3. Following the grant of permission, the parties filed voluminous evidence, and there was a further hearing over 3 days. I believe that, with the benefit of this further material and assisted by detailed submissions from the very able counsel on behalf of their respective clients, I am now in a position to decide, with sufficient confidence, the disputed issue, and that it is not appropriate to make a further reference to the Court of Justice in Luxembourg. In my judgment granting permission I set out some of the legislative, regulatory and commercial background to the claim. However, it is convenient to have in one judgment everything that I believe is relevant to the resolution of the issue.
4. I set out first the current legal framework for the supply of postal services. That framework is set by EU law and is implemented in detail by somewhat complex provisions of UK legislation. It is, however, necessary to have a firm understanding of this framework before considering the meaning and scope of the VAT exemption. I then set out the EU VAT exemption, and explain how it has been currently implemented in UK legislation. I next provide a more detailed, albeit brief, description of postal operations, and of the regulatory perspective in the UK. I then consider the Court's judgment in TNT and TNT Post's submissions in this claim, before giving my reasoned conclusions.

The Legal Framework for Postal Services

EU

5. Directive 97/67 of the European Parliament and of the Council on common rules for the development of the internal market of Community postal services and the improvement of quality of service ("the Postal Services Directive") aims to:

"guarantee at Community level a universal postal service encompassing a minimum range of postal services of a specified quality to be provided in all Member States at an affordable price for the benefit of all users irrespective of their geographical location in the Community" (Recital 11)

6. Article 2 defines the 'postal network' as:

"the system of organisation and resources of all kinds used by the universal service provider(s) for the purposes in particular of

-the clearance of postal items covered by a universal service obligation from access points throughout the territory,

-the routing and handling of those items from the postal network access point to the distribution centre,

-distribution to the addresses shown on the items".

7. Article 3(1) of the Directive requires Member States to ensure that 'users' enjoy the right to a universal service 'of a specified quality at all points in their territory at affordable prices for all users'. 'Users' are defined as 'any natural or legal person benefiting from the postal service provision as a sender or an addressee' (Article 2(17)).
8. Article 3(2)-(7) mandates certain minimum requirements with which the universal service in each Member State must comply.
9. In accordance with the principle of subsidiarity, Member States are entitled to provide for a universal postal service beyond the minimum requirement mandated by Article 3. Further, recital 10 provides:

"Whereas in accordance with the principle of subsidiary, a set of general principles should be adopted at Community level, whilst the choice of exact procedures should be a matter for the Member States, which should be free to choose the system best adapted to their own circumstances".

10. Article 11a, first sentence, provides that access to elements of postal infrastructure or services within the scope of the universal service shall be made available where necessary to protect the interests of users and/or to promote competition. However, this requirement is subject to the important provision that the general obligation is:

"without prejudice to the right of Member States to adopt measures to ensure access to the postal network [defined in Article 2 as the system of organisation and resources of all kinds used by the universal service provider for the purpose of clearance, routing and handling of items covered by a universal service obligation and distribution to the addresses shown on items] under transparent, proportional and non-discriminatory conditions" (Article 11a, second sentence).

11. Article 12 requires Member States to ensure that tariffs for each of the services forming part of the universal service comply with certain requirements, including that prices shall be affordable.
12. Article 14 requires that the universal service provider shall keep separate accounts in order to distinguish clearly between each of the services and products which are part of the universal service and those which are not.

UK

13. The Postal Services Act 2011 ('PSA 2011') Part 3 provides the framework for the regulation of postal services in the UK.
14. Under section 28 PSA 2011 persons may now provide postal services without the need for any licence or authorisation, but the provision of postal services may be subject to regulatory conditions imposed by Ofcom. A variety of types of condition may be imposed on postal service operators by Ofcom under the provisions of Part 3 PSA 2011. Some are 'universal service conditions' which can be imposed only on a 'universal service provider' (sections 36-39 PSA 2011). Others can be imposed on any postal operator (sections 41 and 49-52 PSA 2011).
15. Sections 29 to 34 PSA 2011 are grouped together under the heading 'The universal postal service'.
16. Section 29(1) PSA 2011 requires Ofcom to 'carry out their functions in relation to postal services in a way that they consider will secure the provision of a universal postal service'.
17. Section 29(3) provides:

"in performing that duty Ofcom must have regard to: (a) the need for the provision of a universal postal service to be financially sustainable; and (b) the need for the provision of a universal postal service to be efficient before the end of a reasonable period and for its provision to continue to be efficient at all subsequent times".

18. Section 29(4) provides that:

"the reference in [section 29(3)(a)] to the need for the provision of a universal postal service to be financially sustainable includes the need for a reasonable commercial rate of return for any universal service provider on any expenditure incurred by it for a purpose of, or in connection with, the provision by it of a universal postal service".

19. Ofcom is required by section 30(1) PSA 2011 to set out by order a description of the services which they consider should be provided in the UK as a universal postal service and the standard with which these services are to comply.
20. The universal postal service must include the minimum services prescribed by section 31, read with sections 32 and 33 PSA 2011.
21. Before making or modifying an order made under section 30 PSA 2011 Ofcom must carry out 'an assessment of the extent to which the market for the provisions of postal services in the UK is meeting the reasonable needs of users of those services' This requirement did not apply to the making of the first universal postal service order. However, Ofcom was required to carry out an assessment of this kind before the end of the period of 18 months from the coming into force of Part 3 PSA 2011; see section 30(4) PSA 2011. Ofcom's Review of User Needs was published on 27 March 2013.
22. Sections 35 to 39 PSA 2011, grouped together under the heading 'Universal service providers' provide as follows.
23. Under section 35 PSA 2011, Ofcom designates a postal operator as a universal service provider.
24. Under section 36 PSA 2011, Ofcom may impose a designated USP condition on the universal service provider requiring the USP to provide the universal postal service in accordance with the standards set out in the universal postal service order made under section 30(1).
25. Section 38 deals with 'USP access conditions'. That section provides in part:

"(1) OFCOM may impose a USP access condition on a universal service provider.

(2) A USP access condition is a condition requiring the provider to do either or both of the following-

(a) to give access to its postal network to other postal operators or users of postal services, and

(b) to maintain a separation for accounting purposes between such different matters relating to access (including proposed or potential access) to its postal network as OFCOM may direct.

(3) The provider's 'postal network' means the systems and all the resources used by the provider for the purposes of complying with the universal service obligations (and accordingly, includes arrangements made with others for the provision of any service).

(4) OFCOM may not impose a USP access condition unless it appears to them that the condition is appropriate for each of the following purposes-

(a) promoting efficiency,

(b) promoting effective competition, and

(c) conferring significant benefits on the users of postal services.

(5) In addition, OFCOM may not impose any price controls on a universal service provider in a USP access condition unless it appears to them that the provider concerned-

(a) might otherwise fix and maintain some or all of its prices at an excessively high level with adverse consequences for users of postal services, or

(b) might otherwise impose a price squeeze with adverse consequences for users of postal services".

26. Sections 48 to 52 PSA 2011, grouped together under the heading 'Postal Operators Generally', provide Ofcom with powers to impose conditions on such operators.
27. Section 50 PSA 2011 empowers Ofcom to impose 'General access conditions'. It provides:

"(2) A general access condition is a condition requiring the operator to do either or both of the following-

(a) to give access to other postal operators, or users of postal services, to the operator's postal infrastructure or any service within the scope of the universal postal service which it provides, and

(b) to maintain a separation for accounting purposes between such different matters relating to access of a kind within paragraph (a) (including proposed or potential access of that kind) as OFCOM may direct.

(3) An operator's 'postal infrastructure' includes both physical infrastructure (such as letter boxes) and infrastructure in non-physical form (such as information relating to postcodes or addresses or arrangements made with others for the provision of any service).

(4) OFCOM may impose a general access condition only if it appears to them that the condition is necessary for either or both of the following purposes

(a) promoting the interests of the users of postal services, and

(b) promoting effective competition".

28. Following a period of consultation, Ofcom published 'Securing the Universal Postal Service: Decision on the new regulatory framework' ('the March 2012 Decision'), in which, amongst other things:

i) Ofcom made the Postal Services (Universal Postal Service) Order 2012 ('the UPS Order') which prescribed the content and standard of the universal service obligation in the UK.

ii) Ofcom, having designated Royal Mail as the USP, imposed on Royal Mail a designated universal service provider ('USP') condition requiring Royal Mail to discharge the universal service obligation.

iii) Ofcom imposed a USP access condition on Royal Mail. This condition applies to access to the universal service provider's postal network for the purposes of providing D+2 and later than D+2 Letters and Large Letters services ('D+2 Access'): i.e 'retail services that aim to deliver two working days (or later) after collection from the sender' (See USPA 1.1, 1.2 and 1.3(h)).

iv) The USP access condition imposes various regulatory requirements on Royal Mail in the provision of the mandated access services, including controls on the price and other terms of the mandated access service.

v) In Chapter 10 of the March 2012 Decision, Ofcom sets out the reason for imposing the USP access condition for the purposes of providing D+2 Access as well as Ofcom's reasons for deciding that it was not appropriate to mandate access to other access services.

vi) Ofcom has not imposed any access condition on any operator, including Royal Mail, under the power contained in section 50 PSA 2011.

The EU VAT Exemption

29. Article 132 of Council Directive 2006/112/EC of 28 November 2006 on the Common System of VAT, entitled 'Exemptions for certain activities in the public interest', requires Member States to exempt certain transactions from VAT. Article 132 (1)(a) exempts:

"The supply by the public postal services of services other than passenger transport and telecommunication services, and the supply of good incidental thereto" (emphasis added)

30. At first sight it would appear sufficient to identify in each Member State 'the public postal services', and all the services supplied by such a supplier would fall for exemption. However, following the judgment of the Court of Justice in TNT that is plainly not the case. It is common ground that there is a limit to the scope of the exemption and that not all services supplied by 'the public postal services' are exempt from VAT. The parties disagree as to precisely where the line must be drawn.
31. It is, furthermore, common ground what constitutes 'the public postal services'. It is convenient at this point to set out the relevant passage from TNT in which the Court of Justice defined 'the public postal services':

"30. It follows that, in contrast to what is claimed by TNT Post and the Finnish and Swedish governments, the exemption laid down in art 13A(1)(a) of the Sixth Directive cannot be interpreted so as to cover, in essence, supplies of postal services, such as the reserved services within the meaning of art 7 of Directive 97/67, regardless of the status of the provider of these services.

31. Secondly, the terms used to specify an exemption such as that set out in art 13A(1)(a) of the Sixth Directive are to be interpreted strictly, since it constitutes an exception to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person. Nevertheless, the interpretation of those terms must be consistent with the objectives pursued by those exemptions and comply with the requirements of the principle of fiscal neutrality inherent in the common system of VAT. Thus, the requirement of strict interpretation does not mean that the terms used to specify the exemptions referred to in art 13 should be construed in such a way as to deprive the exemptions of their intended effect (see to that effect, Haderer v Finanzamt Wilmersdorf (Case C-445/05 [2008] STC 2171, [2007] ECR I-4841, para 18 and the case law cited).

32. Thus, as the title which art 13A of the Sixth Directive carries, the exemptions provided for in that article are intended to encourage certain activities in the public interest.

33. That general objective takes the form, in the postal sector, of the more specific objective of offering postal services which meet the essential needs of the population at a reduced cost.

34. As Community law now stands, such an objective is the same, in essence, as that of Directive 97/67 to offer a universal postal service. Under art 3(1) of that directive, such a service involves the permanent provision of a postal service of specified quality at all points in their territory at affordable prices for all users.

35. Therefore, notwithstanding the fact that it cannot be used as a basis for the interpretation of art 13A(1)(a) of the Sixth Directive, the legal basis of which differs from that of Directive 97/67, the latter directive nevertheless constitutes a useful point of reference for the purposes of interpreting the term 'public postal services' within the meaning of that provision.

36. It follows that public postal services within the meaning of art 13A(1)(a) of the Sixth Directive must be regarded as operators, whether they are public or private (see, to that effect Commission v Germany, para 16), who undertake to supply postal services which meet the essential needs of the population and therefore, in practice, to provide all or part of the universal postal service in a member state, as defined in art 3 of Directive 97/67.

37. Such an interpretation is not contrary to the principle of fiscal neutrality, which precludes economic operators carrying out the same transactions from being treated differently in relation to the levying of VAT (see JP Morgan Fleming Claverhouse Investment Trust plc v Revenue and Customs Comrs (Case C-363/05) [2008] STC 1180, [2007] ECR I-5517, para 46 and the case law cited).

38. As the Advocate General observes in para 63 of her opinion, the assessment of the comparability of the services supplied hinges not only on the comparison of individual services but on the context in which those services are supplied.

39. As the facts in the main proceedings demonstrate, on account of the obligations described in para 12 of this judgment, which are required under its licence and connected with its status as the universal service provider, an operator such as Royal Mail supplies postal services under a legal regime which is substantially different to that under which an operator such as TNT Post provides such services.

40. Consequently, the answer to the first question is that the term 'public postal services' in art 13A(1)(a) of the Sixth Directive must be interpreted to cover operators, whether they are public or private, who undertake to provide, in a member state all or part of the universal postal service, as defined in art 3 of Directive 97/67."

32. It is uncontroversial that in the UK Royal Mail is the operator who undertakes to provide the universal postal service (as defined in art 3 of Directive 97/67) and who, therefore, is the 'public postal services' for the purposes of article 132 (1)(a) of the VAT Directive.

Current UK Implementation of the EU VAT Exemption

33. Section 31(1) of VATA 1994 provides that:

"A supply of goods or services is an exempt supply if it is of a description for the time being specified in Schedule 9…"

34. With effect from 1 October 2011 Group 3 of Schedule 9 to VATA exempts:

"1. The supply of public postal services by a universal service provider.

2. The supply of goods by a universal service provider which is incidental to the supply of public postal services by that provider.

NOTES:

(1) [repealed]

(2) Subject to the following Notes, 'public postal services', in relation to a universal service provider, means any postal services which the provider is required to provide in the discharge of a specified condition.

(3) Public postal services include postal services which a universal service provider provides to allow a person access to the provider's postal network (within the meaning of section 38 of the Postal Services Act 2011) and which are required to be provided by a specified condition.

(4) Services are not 'public postal services' if-

(a) the price is not controlled by or under a specified condition, or

(b) any of the other terms on which the services are provided are freely negotiated.

(5) But Note (4) does not apply if a specified condition requires the universal service provider to make the services available to persons generally-

(a) where the price is not controlled by or under the condition, at the same price, or

(b) where terms are freely negotiated as mentioned in Note (4)(b), on those terms.

(6) In this Group 'specified condition' means a designated USP condition, a USP access condition or a transitory condition under paragraph 5 of Schedule 9 to the Postal Services Act 2011 which is imposed only on a universal service provider.

(7) Any expression which is used in this Group and in Part 3 of the Postal Services Act 2011 has the same meaning in this Group as in that Part".

35. Group 3, therefore, confers exemption on the relevant supplies of only 'a universal service provider', as defined in Part 3 of the PSA 2011. Again it is common ground that this is a valid implementation of the VAT Directive because under the applicable UK legislation it is a universal service provider, as so defined, 'who undertakes to provide the universal postal service' (paragraph 40 of TNT).
36. 'Public Postal services' within Group 3 are simply any services which the USP is required to provide 'in the discharge of a specified condition'. 'Specified Condition' comprises, first, a designated USP condition, so that services within the USO are exempt; and secondly, a USP access condition, so that access services are in principle also exempt. Note 3 puts the position beyond doubt as to access services.
37. In order for the service to be exempt, it must be price controlled under the designated USP access condition, and the other terms on which the services are provided must not be freely negotiated, unless under the designated USP condition or the USP access condition the USP is required to make the service available to persons generally at the same price, on the same terms. The USP access condition requires Royal Mail to offer only terms which are 'fair, reasonable and non discriminatory'. Royal Mail is also obliged (USPA 7) to publish standard terms and conditions which are subject to a detailed procedure before they can be amended. Ofcom has power to set the terms of access under a dispute resolution procedure.

Brief Description of Postal Operations

38. Royal Mail provides three broad groups of services: those falling within the USO, those falling outside the USO and access services. Examples of USO services are stamped mail, and franked mail used by small businesses. Services falling outside the USO include retail bulk mail (such as advertising and business mail), which are generally sorted by the customer before presentation to Royal Mail. All the services use the same USO delivery network, but reach the delivery network by different routes.
39. USO and non-USO mail is collected from a number of facilities: street pillar boxes, post office counters and business mailers' premises. In addition, for business customers with large volume postings (non-USO bulk), mail is collected from customers and injected into the network at a regional distribution centre ('RDC').
40. Once the mail is collected it is initially processed at the mail centres for outward dispatch around the country to other mail centres (outward mail centres, or 'OMC'). Mail (USO and non-USO) is transferred across the country using a network of road, rail and air to achieve the necessary national distribution. Collection and outward sortation are known as the 'upstream' network.
41. On arrival at the inward mail centre ('IMC'), the mail is further sorted in the early hours of the morning to individual delivery offices and transferred through local distribution to the individual delivery office.
42. Postal companies (such as TNT Post) that have downstream access arrangements collect mail in bulk from business customers, sort and transport it using their own network, before handing it over to Royal Mail at each of the IMCs. At this point the IMCs process all three types of mail, and all make shared use of the downstream delivery network assets. Some business customers carry out their own 'upstream' activities, and contract directly with Royal Mail for downstream access.
43. Once the mail (USO, non-USO and access mail) is received at the delivery office ('DO') it may receive a final preparation for specific delivery routes. It is then sequenced to the final delivery point in preparation for actual delivery to individual addresses ('indoor delivery').
44. Finally, the mail is taken from the DO and delivered to the individual addresses ('outdoor delivery'). Delivery to individual addresses employs a combination of vehicles, cycles, and foot delivery, and this activity is the most labour intensive part of the mail process. Many of the assets involved in the delivery stage are also shared with collections (notably vehicles, staff and premises). The IMC, DO networks and delivery are known as the 'downstream' network.
45. Royal Mail under the regulatory access condition is required to offer access to the network at the IMC. That is the part of the mail centre which carries out the process of final sorting for delivery (in that mail centre's catchment area) of mail received from the upstream part of Royal Mail's network, or from other postal operators, to the final address.
46. As the designated USP Royal Mail is required to:

i) provide at least one delivery of letters originating from anywhere in the world six days a week (Monday to Saturday) to the home or premises of every individual or other person in the UK, and to delivery points approved by Ofcom;

ii) provide at least one delivery of other postal packets originating from anywhere in the world five days a week (Monday to Friday) to the home or premises of every individual or other person in the UK and to delivery points approved by Ofcom (see March 2012 Statement, at Annex 7).

47. Furthermore, under designated USP Condition 1, Ofcom requires that Royal Mail should meet a series of performance targets in relation to this universal service, including:

i) 99.9 per cent of delivery routes completed each day;

ii) 93 per cent of USO priority services deemed delivered with an actual routing time of D+1; and

iii) 98.5 per cent of USO standard services for packets weighing up to 1kg deemed delivered with an actual routing time of D+3 (See further the March 2012 Statement at Annex 7. D+1 means next day delivery; D+3 means delivery on the fourth day from posting).

Regulatory Perspective

48. The focus of UK postal services regulation (set out in Ofcom's March 2012 Statement) is on 'the provision of the USO and the provision of access to the USO network for other operators'. Since its launch, access has grown rapidly (Ofcom's March Statement at 1.15, 10.10).
49. 'Bulk mail services' are retail services which enable senders, typically banks and insurance companies, to post in large volumes at a reduced rate. Royal Mail provides retail end-to-end bulk mail services, as do other postal operators, by performing the upstream part of the service and using Royal Mail's mandated access for the downstream delivery part of the bulk service. Such operators, including TNT Post, may contract as agents on behalf of their customers to receive Royal Mail access services. In that way the customer receives the 'downstream' component of the supply as exempt from VAT.
50. TNT Post estimates that business mail accounts for about 85 per cent of all mail volumes in the UK. According to Royal Mail inquiries, 44 per cent of the UK mail bag consists of access mail. In its reviews Ofcom has given considerable attention to the interests of business users: see the Ofcom Review of 27 March 2013 in which Ofcom assessed the extent to which the market for the provision of postal services in the UK was meeting the reasonable needs of the users of these services; and the Ofcom statement in March 2013 on the affordability of Universal Postal Services. As matters currently stand, about 20 per cent of the users of postal services in the UK by volume benefit from the VAT exemption through the agency arrangement mentioned above.
51. Bulk mail services were previously included in the USO. However, Postcomm (the previous regulator) considered that mandated access (to Royal Mail's USO network) conferred significant benefits on the users of postal services through greater choice of postal operators, leading to improvements in customer service, quality and lower prices. Furthermore, Postcomm considered that lower prices were likely to have helped maintain volumes in comparison with faster declines in other mail segments in recent years and this would have helped to sustain the universal service, with Royal Mail retaining over 80 per cent of the revenue from these services. Ofcom (Postcomm's successor) considered that the continuation of access competition was likely to be consistent with its primary duty to secure the provision of the universal service in a way which was financially sustainable and efficient. Ofcom considered that mandated access was:

"an important component of competition which will provide incentives for the provision of the universal service to be financially sustainable, without threatening the financial sustainability of the universal service"

It is on this basis that in the UK the efficiency, availability and price competiveness of bulk retail services are secured and promoted. The public interest no longer requires bulk retail services specifically to be included in the USO.

52. This contrasts with the position in most other EU Member States. Ofcom observed that a number of European countries, including Denmark, France and Germany, have a specific requirement within their universal services for the postal operator to deliver periodicals, bulk mail and direct mail. Such services will of course be indisputably exempt from VAT. In those Member States downstream access to the network of the universal service provider is not mandated, and the essential tool for access competition, bringing the public interest benefits identified by Ofcom in the UK, is missing.
53. There is also an intrinsic operational link between mandated access and Royal Mail's position as the USP. In her expert economic report for these proceedings on behalf of Royal Mail, Dr Helen Jenkins demonstrated that the delivery network providing access and USO services is a shared network and that access services can be provided at a low incremental cost to that in any event incurred in operating the USO network. Dr Jenkins also demonstrated that prices for USO services could, ceteris paribus, be expected to increase significantly were the VAT exemption on mandated access services removed, and that the VAT exemption on mandated access services allows services within the USO to be provided at a significantly reduced cost. Under the current regulatory regime Ofcom has regard to the revenues from access services in evaluating financial sustainability of USO services, and the scenario presented in the analysis of Dr Jenkins would appear to raise questions about what might occur under that regime if the VAT exemption were removed.
54. All this would naturally raise the question why access services are simply not included specifically in the definition of the USO. It appears that the reason is a technical one. Postcomm, in its September 2004 proposals for consultation, stated:

"Two types of access are available. Access can be provided to licensed operators (such as UK Mail) or directly to customers (e.g a bank). Access used by operators such as UK Mail cannot be classified as a universal service. This is because the…Directive requires that 'users' have the right to a universal service… 'Users' are defined only as senders or addressees of mail, and not operators. Therefore, the use of access by, say, a financial institution could be classified as a universal service but the use of access by an operator such as UK Mail could not be said to be a universal service…Postcomm therefore proposes that access (to both customers and operators) should not be considered as a universal service, but substantially similar to a universal service (and, therefore, within the scope of the universal service)" (at 4.35 and 4.39; see also Postcomm's June 2005 Decision 'The Universal Service for Bulk Mailers, at 3.24) (emphasis added).

55. Although the reason for the non-inclusion of mandated access services specifically in the USO appears a technical one, it may not in fact be correct. I have explained that postal operators, such as TNT Post, do not always contract as principals for the delivery of Royal Mail's mandated access services. Such postal operators contract as agents on behalf of the business customer, such as a financial institution. It is, therefore, the 'sender' (i.e business customer) who is contractually receiving the mandated access service. That also accords with economic reality, because the postal operator, such as TNT Post, acquires the mandated access service, not for the purpose of securing downstream delivery of its own mail, but in order to effect final delivery of the mail of its business customers, such as financial institutions, who are, of course, 'senders' within the meaning of the Directive.

The Judgment of the Court of Justice in TNT

56. The second and third questions on the reference were whether the VAT exemption applied to all of the postal services provided by the public postal services, or only part of those services, and what the correct criterion should be. The Court of Justice answered as follows:

"41. By its second and third questions, which it is appropriate to deal with together, the referring court essentially asks whether the exemption provided for in art 13A(1)(a) of the Sixth Directive applies to all of the postal services provided by the public postal services or only part of those services. In the latter situation, it wishes to know the criteria enabling the exempted services to be identified.

42. It must be observed in this connection that, under art 13A(1)(a) of the Sixth Directive, the supply of services by the public postal services and supply of goods incidental thereto are exempted from VAT. Only passenger transport and telecommunications services are expressly excluded from the scope of that provision.

43. However, contrary to what is maintained by Royal Mail, the Greek and United Kingdom Governments and Ireland, it may not be inferred from that provision that all the supplies of services by the public postal services and supplies of goods incidental thereto which are not expressly excluded from the scope of that provision are exempted, regardless of their intrinsic nature.

44. It follows from the requirements referred to in para 31 of this judgment that the exemption provided for in art 13A(1)(a) must be both strictly interpreted and interpreted consistently with the objectives of that provision, that the supplies of services and of goods incidental thereto must be interpreted as being those that the public postal services carry out as such, that is, by virtue of their status as public postal services.

45. Such an interpretation is dictated, in particular, by the need to observe the principle of fiscal neutrality. The obligations on an operator such as Royal Mail, which-as is apparent from para 39 of this judgment- distinguish the situation in which that operator supplies postal services from that in which an operator such as TNT provides such services, concern only the postal services supplied in its capacity as the universal service provider.

46. In the same way, it follows from the requirements set out in para 44 of this judgment and, in particular, from the nature of the objective pursued by art 13A(1)(a), which is to encourage an activity in the public interest, that the exemption is not to apply to specific services dissociable from the service of public interest, including services which meet special needs of economic operators (see, to that effect, Criminal proceedings against Corbeau (Case C-320/91) [1993] ECR I-2533, para 19).

47. The German government and the Commission are therefore correct to submit that services supplied by the public postal services for which the terms have been individually negotiated cannot be regarded as exempt under art 13A(1)(a) of the Sixth Directive. By their very nature, those services meet the special needs of the user concerned.

48. That interpretation is, moreover, confirmed by recital 15 in the preamble to Directive 97/67, from which it is apparent that the option to negotiate contracts with customers individually does not correspond, in principle, with the concept of universal service provision.

49. Consequently, the answer to the second and third questions is that the exemption provided for in art 13A(1)(a) of the Sixth Directive applies to the supply by the public postal services acting as such- that is, in their capacity as an operator who undertakes to provide all or part of the universal postal service in a member state-of services other than passenger transport and telecommunications services, and the supply of good incidental thereto. It does not apply to supplies of services or of any goods incidental thereto for which the terms have been individually negotiated."

The Claimant's Submissions

57. TNT Post's submission is that in TNT the Court of Justice held that, in confining the exemption to those services supplied by the USP 'as such', that is, by virtue of their status as 'public postal services', only those services forming part of the USO were exempt from VAT. Ms Hamilton, on behalf of TNT Post, primarily submits that this interpretation of the judgment best reflects the language used by the Court, produces a clear and unambiguous test, and is supported both by the Opinion of the Advocate General and the view of the VAT Committee of the European Commission.
58. As to the specific language used by the Court, it is, in my view, notable that the Court did not in terms limit the scope of the exemption to those services, and those services alone, forming part of the universal service. The Court could have used such a mechanistic formula. Furthermore, the Commission and Germany had expressly argued before the Court that:

"the exemption is intended to apply only to those services of the universal service provider which count directly as part of the universal service provision" (see the Opinion of the Advocate General, paragraph 68).

By its exact language , the Court was deliberately keeping open the possibility that the USP might 'as such' supply certain services, not directly forming part of the universal service, which nonetheless were supplied under conditions (especially as to price) that applied uniquely to the USP, by virtue of its status as USP, and which were imposed specifically to promote the public interest recognised by the Directive, namely, offering postal services which meet the essential needs of the population at a reduced cost.

59. This interpretation is consistent with the judgment read as a whole. At paragraph 39 of the judgment the Court referred to obligations which were recognised under the licence of the USP and were connected with its status as the USP. Then at paragraph 45 the Court again referred to those obligations as being the ones which distinguished 'the situation in which that operator [the USP] supplies services from that in which an operator such as TNT provides such services'. The Court is thereby identifying the relevant key difference between the USP and the ordinary commercial postal operator, namely, the acceptance of obligations, applied uniquely to the USP, by virtue of its status as USP, specifically to promote the public interest recognised by the Directive. Consistently with that rationale, the Court went on to hold that if, to meet the special needs of the user concerned, the USP negotiated individual terms and conditions of supply, it was in effect acting as an ordinary commercial postal operator, supplying specific services that were 'dissociable from the service of public interest'. There is no doubt whatsoever that, in delivering mandated access services, Royal Mail is not acting as an ordinary commercial postal operator.
60. As to the Opinion of the Advocate General, the Court notably did not adopt the language of paragraph 89 of the Opinion, when the Court could simply have done so. The Advocate General appears to equate the services of a USP, which the USP supplies 'as such', with the universal services. The Court does not make that assimilation. The Court refers more broadly to services which the USP makes 'in their capacity as an operator who undertakes to provide all or part of the universal postal service in a Member State'.
61. On 9 September 2010 the VAT Committee of the European Commission issued guidelines which dealt with the scope of the VAT exemption for postal services. It appears that the view of the Committee may properly be taken into account in considering the meaning of the EU VAT Directive: see the Opinion of the Advocate General in Minister Finansow v RR Donnelley Global Turnkey Solutions Poland Case C-155/12. The Committee considered that the exemption was 'limited to the services falling under the "universal service" as provided for in article 3 of [The Postal Services Directive]'. However, with great respect to the Committee, it was not considering the specific issue that I have had to address in this claim. It did not have before it the detail of the UK postal service legislation that has been put before me, nor did it have an explanation of the regulatory and practical background that I have described.
62. If I have identified the correct public interest test under the VAT Directive, I believe that the case for exempting access services is compelling, having regard to the following matters:

i) Article 11a of the Postal Services Directive specifically contemplates that USPs may be required, in their capacity as such, to provide access services, and to do so under transparent, proportional and non-discriminatory conditions. That is an obligation that may be imposed only on USPs. Given the context, the EU legislator plainly envisaged that the imposition of such an obligation only on USPs could be expected to increase competition and to promote the public interest objectives of the Postal Services Directive (which the Court recognised to be no different from the public interest in the VAT Directive);

ii) Section 38 PSA 2011 requires Royal Mail to provide access services, that is, to give other operators access to 'the systems and all the resources used by the provider for the purposes of complying with its universal service obligation' (emphasis added). That requirement is imposed uniquely on Royal Mail by virtue of its status as a USP. Furthermore, the requirement is imposed only if certain criteria are met. The criteria are clearly designed with the public interest in view, and the purpose of imposing the requirement is plainly to increase competition and to promote the public interest objectives more generally of the Postal Services Directive and of the PSA 2011;

iii) The terms of access have to be 'fair and reasonable' and are standardised. They are closely monitored by Ofcom. Prices are specifically controlled by the imposition of a wholesale/retail margin, and that too is closely scrutinised by Ofcom. The purpose again is to secure effective competition and to promote the public interest;

iv) 'Users' have benefited, and continue to benefit, both directly and indirectly, by the operation of the mandated access service. That has been recognised by Ofcom, who again keep the matter under close supervision and are empowered to take such steps as are considered appropriate to ensure that the obligation on the USP to provide access services is such as to continue to promote the public interest in the most effective manner;

v) Access services cannot be 'dissociated' from services that the USP supplies 'as such' because those services are intended to promote, and do promote, the relevant public interest. I note also that access services might well have been included specifically within the definition of the USO, had it not been for the perceived technical difficulty that I have mentioned.

Fiscal Neutrality and Competition

63. In support of her primary submission Ms Hamilton invoked fiscal neutrality and, connected therewith, alleged distortion of competition resulting from the scope of the present UK VAT exemption.
64. The principle of fiscal neutrality precludes different treatment for VAT purposes of economic operators carrying on the same activities and of similar goods or services which are thus in competition with each other (see Value Added Tax: Commentary and Analysis ed. Lasok Part II at 2.71). The principle is not itself a general principle of European law but is merely a secondary level expression of the general principle of equal treatment and dependant for implementation by enactment of legislation (NCC Construction Danmark v Skatterministeriet (C-174/08 [2009] ECR I-10567 at [42]-[43]). In case C-44/11 Deutsche Bank [2012] ECR I-0000 at [45] the Court of Justice, adopting the view of Advocate General Sharpston, confirmed that 'the principle is not a rule of primary law which can condition the validity of an exemption', but is a principle of interpretation to be applied 'concurrently' with other principles governing the construction of the exemptions from VAT. The Advocate General in that case recognised that 'partly competing activities may sometimes receive different VAT treatment' (paragraph 31).
65. The Court of Justice specifically addressed the issue of fiscal neutrality at paragraph 45 of the judgment in TNT. The Court held that the obligations imposed on the USP concerned 'only the postal services supplied in its capacity as the universal service provider' and, therefore, (for the purpose of fiscal neutrality) distinguished the USP's situation from that of operators such as TNT Post. I take that to mean that, if a certain supply is made by the USP 'as such', namely, in its capacity as a USP, the principle of fiscal neutrality is sufficiently recognised.
66. I believe that the interpretation that I have reached is consistent with the Court's rationale as regards fiscal neutrality. For the reasons already given, Royal Mail supplies mandated access services by virtue of its status as a USP. No other operator, such as TNT Post, supplies such services, or could be required to supply such services, for the obvious reason that no other operator is a USP. The requirement to supply access services is imposed only on Royal Mail in its capacity as a USP in order to increase competition and promote the relevant public interest. Even if another operator, such as TNT Post, provided access to its delivery network (if it had one), or provided services that might be considered in competition with access services of Royal Mail, it would not do so under the same conditions as Royal Mail: it would not be a USP, and it would not be required (as an important means of increasing competition and promoting the relevant public interest) to provide such services as a USP, and to provide them subject to the regulatory controls that applied uniquely to the USP.
67. For the sake of completeness on this issue, I should add that I do not consider that Rank Group v HMRC [2012] STC 23 takes the matter further. In that case the Court of Justice cited with approval the passages in TNT dealing with fiscal neutrality, and specifically recognised that the status of a supplier, such as a USP, could 'create a distinction [for the purpose of fiscal neutrality] in the eyes of the consumer in terms of the satisfaction of his own needs'.
68. As to distortion of competition, this is, in my view, in the present context no more than an aspect of fiscal neutrality, and it should not be treated as an independent interpretative tool. However, the parties spilt considerable ink on this issue and I make the following short observations.
69. For my simplified competition analysis, it seems to me that the relevant market is end-to-end bulk retail delivery to users, in particular, users such as banks and insurance companies who are unable to recover any VAT that they might incur on the relevant supplies. It is clear that this is a very substantial market (see paragraph 50 above). Royal Mail's end-to-end bulk supplies are now all subject to VAT, so that prima facie there is no distortion of competition between Royal Mail's services and those supplied by commercial operators such as TNT Post. However, on a closer view, the VAT exemption does cause an actual distortion, if distortion means simply a market result that would not be expected in the absence of the fiscal treatment. Operators, such as TNT Post, who compete with Royal Mail in the relevant market are able to obtain on behalf of their customers the delivery component of their supply from Royal Mail (through the VAT exempt access service). That component is by far the largest cost component of the end-to-end service. Such operators may then supply the competing service to their customers at a lower price to the extent that a substantial part of that price to their customers carries no VAT burden. In simple terms, Royal Mail's total price for the end-to-end bulk supply to its customers is subject to VAT; the price of other operators to their customers (exploiting the mandated access service) is only marginally subject to VAT (on the 'upstream' element). End users, of course, may be able directly to take advantage of the access service, performing for themselves the 'upstream' component, and could choose to do so at least in part in order to avoid the VAT burden implicit in acquiring end-to-end bulk retail supplies from Royal Mail.
70. Somewhat paradoxically (given the nature of the position of TNT Post on competitive distortion) the current VAT exemption confers a significant price advantage on Royal Mail's rivals in the relevant market. It is obvious that small operators, in particular, have a useful means of acquiring and increasing relevant market share at Royal Mail's expense. However, Ofcom must be aware of this market situation, and must believe that the mandating of access services (notwithstanding the VAT exemption) promotes competition more generally, or brings other public interest benefits to the ultimate advantage of users.
71. It also seems to me that the present VAT exemption potentially distorts competition because it tends to create a disincentive to an operator such as TNT Post from entering the 'downstream' end of the market. If TNT Post offered its own end-to-end bulk retail services in the relevant market, establishing its own delivery network, it would have to charge VAT on the total price of the supply. The competitors of TNT Post could, however, continue to provide the 'upstream' component to their customers and to acquire the 'downstream' element from Royal Mail. TNT Post's competitors would not have to impose a VAT charge on the 'downstream' element (that element being provided through Royal Mail's access service), and, other things being equal, could offer their customers a lower total price than that offered by TNT Post providing its putative integrated end-to-end service. Removal of the VAT exemption would deprive TNT Post's potential competitors of that price advantage, and they might have real difficulty in competing with TNT Post, to the extent that they were not able economically to establish their own 'downstream' network.
72. TNT Post's own evidence suggests that economic provision of the 'downstream' element would depend on achieving a very large share of the relevant market. Removal of the VAT exemption would tend to raise the price of end-to-end retail bulk supplies, and demand would tend to shift towards any operator having its own downstream facilities. Dr Jenkins in her expert report sought to calculate the extent of the potential shift, and the resulting possible loss of revenue to Royal Mail, on a number of comparative market scenarios.
73. Removal of the exemption, in the hypothetical circumstances that I have described, would be likely to confront the regulator with important questions about long term market structure and competition in the relevant market. However, as I have said, none of this bears on the proper interpretation of the VAT exemption and I do not fortunately have to delve deeper into what appear to me to be potentially challenging issues of public policy.
74. I have focussed on the current VAT exemption. The historical position is not without significance, for TNT Post maintains that following the judgment of the Court of Justice the United Kingdom continued to fail to implement the EU VAT exemption correctly and continued to exempt services which, upon TNT Post's interpretation of the judgment, ought to have been exempted from VAT. TNT claims that it suffered damage by reason of this alleged illegality. It is probably clear from what I have said about the current VAT exemption how I shall approach the historic position.
75. The previous relevant legislation was the Postal Services Act 2000 ('PSA 2000'). Until 1 October 2011 the relevant regulator was Postcomm, as provided in section 1 PSA 2000. From 1 October 2011 Postcomm was replaced by Ofcom: s. 3 of the PSA 2011. During the relevant period Royal Mail provided universal services pursuant to licence conditions imposed on it pursuant to the powers and duties conferred on Postcomm by PSA 2000.
76. Section 3 imposed a duty on Postcomm, as follows:

"Duty of Commission to ensure provision of a universal postal service."

"(1) The Commission shall exercise its functions in the manner which it considers is best calculated to ensure the provision of a universal postal service.

(2) The Commission may, in particular, impose as a condition of a licence under Part II a requirement that the licence holder provides a universal postal service or part of such a service."

77. Section 3 provided that, where such a condition was imposed, Postcomm could:

"(3)…include in the licence such conditions and other provisions as it considers appropriate in relation to the provisions of such a service (including conditions and other provisions which do not require a licence under Part II)."

78. All conditions and other provisions imposed by Postcomm in Royal Mail's licence were, therefore, either in order to provide a universal postal service or appropriate in relation to the provision of such a service, including regulatory controls relating to pricing and performance standards (conditions 4 and 21 of the licence) and access (condition 9 of the licence).
79. Section 4(1) PSA 2000 stated that the universal service was provided if there was:

"(a)…-.

(i) at least one delivery of relevant postal packets…every working day to the home or premises of every individual or other person in the United Kingdom or to such identifiable points for the delivery of relevant postal packets as the Commission may approve, and

(ii) at least one collection of relevant postal packets is made every working day from each access point.

(b) a service of conveying relevant postal packets from one place to another by post and the incidental services of receiving, collecting, sorting and delivering such packets are provided at affordable prices determined in accordance with a public tariff which is uniform throughout the United Kingdom and-

(c) A registered post service is provided at such prices."

80. Section 4(2) specified that:

"(2) For the purpose of subsection (1)-

…(b) the conclusion with customers of individual agreements as to prices shall not be taken to preclude the provision of a universal postal service"

81. The Postal Services (EC Directive) Regulations 2002, SI 2002/3050 inserted a new section 7A into the PSA 2000. Section 7A defined the 'scope of the universal postal service' as being a postal service or substantially similar to a postal service set out in section 7A(2), namely:

"…a postal service-

(a) which a postal operator is required to provide in the discharge of any duty to provide a universal postal service, or part of such a service-

(i) imposed under section 3(2) as a condition of the operator's licence under Part II, or

(ii) included in his licence as a condition by virtue of section 13(1) or

(b) which a postal operator is required to provide in the discharge of any duty to provide a postal service imposed on him by an order under section 102(2)"

82. Section 7A (3) stated that it was unnecessary for the relevant service to comply with the requirements set out in section 4(1) for it to be considered as 'substantially similar' to a postal service within subsection 7A(2), that is 'within the scope of the universal service'.
83. Postcomm granted a licence to Royal Mail under the PSA 2000. Part 2 of Schedule 2 to the licence was headed 'Universal Postal Services'. Condition 2(1) (under the heading 'Provision of Universal Postal Service in the United Kingdom') provided as follows:

"The licencee shall provide a universal postal service within the United Kingdom subject to the following paragraphs of this condition."

84. Condition 2(2) stipulated the mandatory requirements of the universal service to be provided, and Condition 3 under the heading 'General Universal Service Obligations' continued as follows:

"3. The licencee, in the discharge of its obligations under paragraphs 1 and 2, shall-

(a)…provide the services numbered 1,2,3,4,5,6,7,8,9,12…13…14, in accordance with a public tariff that is uniform throughout the United Kingdom. "

85. The numbered services in their entirety were set out in Part 8 of Schedule 2 under the heading 'Provisions Applicable to the Special Circumstances of Royal Mail Group Plc' (my emphasis). Part 8 comprised two conditions, namely, Condition 21 under the heading 'Prices for postal services', and Condition 22 under the heading 'Access to the Postcode Address File'. The numbered services in Part 8 began at page 123 of the Licence. They ran from number 1 (first class mail not conveyed by other services listed later in the list) to number 51. Part 3 of Schedule 2 to the Licence (under the heading 'Furthering the Interests of Users of Postal Services') controlled, among other things, services in respect of regulated services. Part 4 (under the heading of 'Promotion of Effective Competition Between Postal Operators') imposed an obligation in Condition 9 on Royal Mail to provide access to its postal facilities, and laid down a detailed regime governing access.
86. Ms Hamilton's submission was simple and entirely consistent with her case in respect of the current VAT exemption. She contended that the services listed under Condition 2(3) (see above) comprised 'the universal postal service', and only these services could be exempted from VAT. TNT Post produced a detailed table showing each of the services provided from time to time by Royal Mail, which of these services were exempt, which of the services fell within the universal service (on this argument), and the allegedly competing services of TNT Post.
87. However, in my view, that approach is too narrow. First, in Section 7A of the PSA 2000 Parliament defined services that fell within the scope of the universal postal service to include services that were 'substantially similar to', among other services, a postal service that a postal operator was required to provide in the discharge of any duty to provide a universal postal service. In so far as Royal Mail provided such services it would do so in its capacity as USP. Furthermore, Condition 21 (Prices for postal services) imposed, by Condition 21(1), a specific obligation on Royal Mail to continue to provide the 'Regulated Services'. These 'Regulated Services' included the 'Controlled Services', that is, all the services listed from 1 to 51 already referred to above, including 'access services' (Controlled Services 39-45). These mandatory 'Controlled Services' were subject to detailed price control, running to nearly 50 pages, with access services having their own fairly lengthy pricing controls. As already noted, these services were also subject to regulatory control of service standards.
88. Postcomm, in the exercise of its overarching statutory duty to perform its regulatory function in the manner which it considered was 'best calculated to ensure the provision of a universal postal service', had required Royal Mail, in its capacity as USP, to deliver each of the Controlled Services. No other postal operator was mandated to deliver any of the Controlled Services, including access services, nor do I discern any sound legal basis upon which Postcomm could have imposed any such obligation on another postal operator. Furthermore, to ensure the affordability of such services, Postcomm had imposed strict pricing controls on Royal Mail's provision of the Controlled Services. To ensure satisfactory levels of service Postcomm had also imposed specific standards in respect of such services. To promote effective competition in the postal market, Postcomm had required Royal Mail in its capacity as USP, and Royal Mail alone, to give access to its network.
89. In these circumstances, whether or not a particular service fell within the universal service obligation, or even within the scope of the universal service (as defined in section 7A PSA 2000), Controlled Services, including the access services, were supplied by Royal Mail in its capacity as USP and were entitled to exemption from VAT.
90. The forerunner of the current UK VAT exemption was the result of an amendment made by section 22(2) Finance (No3) Act 2010, and came into effect from 31 January 2011. The only material difference in the definition of 'public postal services' was that the relevant services had to be provided 'in the discharge of a licence duty', rather than 'in the discharge of a specified condition'. The Notes to the exemption were in similar terms, with the same exclusion (subject to the same exception) if the price of the putative service was not controlled by or under a licence, or any of the other terms was freely negotiated. As the analysis of the respective legislation has shown, the practical result was the same. It follows that, if my interpretation of the EU VAT exemption is correct, the forerunner of the current UK VAT exemption represented a lawful implementation of EU law.
91. It is necessary for me to add that Ms Jessica Simor QC, on behalf of HMRC, advanced an alternative argument in support of the current VAT exemption. In essence (if I have correctly understood the argument) she contended that access services fell properly within the delivery services of Royal Mail, acting in its capacity as USP, and were therefore part of the provision of the universal service. It was wrong, she submitted, to equate the universal service with the universal obligation (USO).
92. This was not an argument advanced by HMRC at the permission stage, nor was it one expressly advanced by Royal Mail, although Mr. Javan Herberg QC for Royal Mail appeared content to 'adopt' the argument as an alternative forensic tool. The central difficulty that I have on this alternative submission is that I am unable to reconcile it with the legislative framework. The Postal Services Directive leaves it to Member States to delineate the scope of the universal service in their respective territories. The PSA 2011 has defined the USO with a view to identifying the scope of the universal service in the UK. The access service was not included in the USO, apparently for the technical reason referred to above, although, given the nature and purpose of the access service, it appears to me that, consistently with EU law, and putting aside the perceived technical problem, it could have been included. The access condition has simply been separated in the PSA 2011 from the USO. I am not, therefore, able to accept Ms Simor's alternative argument, but base my conclusion that the access service is supplied by the USP (Royal Mail) in its capacity as such, and is therefore exempt from VAT, for the reasons stated above.

Amendment

93. TNT Post seeks permission to amend the original claim for judicial review brought in 2006 that first challenged the lawfulness of the UK VAT exemption. At the invitation of the parties on 12 July 2007 I referred certain questions to the Court of Justice arising from that claim. The Court's ruling on 23 April 2009 (nearly 2 years later), to which I have already made extensive reference, made clear that the UK VAT exemption, as it stood at that time, went beyond what was permitted by EU law. The purpose of the proposed amendment to the original claim is to allow TNT Post to take advantage of the ruling, in particular, to claim damages alleged to arise as a result of the effect of what has been definitively decided by the Court of Justice to be an over broad VAT exemption on TNT Post's commercial operations during the period when that over broad VAT exemption applied to the postal services supplied by Royal Mail.
94. HMRC object to the grant of permission on a number of grounds. First, HMRC contends that it is too late to amend the original claim. The relevant application was made only on 18 March 2013. However, this has been complex and protracted litigation, conducted against a changing legislative and VAT framework, with considerable delay caused by the reference to the Court of Justice. I would be most unhappy to shut out a claim for damages for an undeniable State infringement of EU law by reason only of the delay that has arisen in this case. HMRC does not point to any significant prejudice to it, or to the public interest more generally, alleged to arise by reason only of the delay. In the interests of justice I would, therefore, have permitted the proposed amendment even though it was made several years after the initial claim.
95. The second objection is more subtle. Ms Simor QC, on behalf of HMRC, submitted that, to allow TNT Post to amend as proposed, would be to allow it to snatch victory from the jaws of defeat, or in her words, to convert a loss into a win. On analysis of the judgment of the Court of Justice TNT Post lost its original claim, and it cannot be allowed to convert that defeat into a victory by a belated amendment. To assess this argument it is necessary to set out the nature of TNT Post's case in the original 2006 claim. Conveniently the Advocate General in her Opinion particularises what TNT Post's case was at that time.
96. On 1 January 2006 the UK postal market became fully liberalised. Any suitable applicant could be granted an appropriate licence to convey all postal items without restriction as to weight. There were no more 'reserved services'. TNT Post contended in the original claim that the liberalisation of the market and abolition of reserved services rendered the EU VAT exemption inoperable, and the UK could no longer exempt any postal services from VAT: see the Opinion of the Advocate General at paragraphs 28 and 51. It appears that TNT Post may also have submitted alternatively that all postal services were now exempt, regardless of the status of the postal supplier (judgment of the Court, paragraph 30). In any event TNT Post's case was rejected: liberalisation of the postal market and the abolition of reserved services did not deprive the EU VAT exemption of effect, nor did they alternatively extend the exemption to all postal services. The exemption applied only to services supplied by a USP in its capacity as such, whether the USP was a state monopoly or a commercial postal operator.
97. However, in my view, putting TNT Post's case in this way takes too narrow a view of the original claim. TNT Post believed that the UK VAT exemption extended beyond what EU law permitted. The second question on the reference specifically sought the Court's guidance as to whether the EU VAT exemption permitted a Member State to exempt all postal services provided by the public postal services; and the third question asked, if some services so provided were exempt, what were the relevant criteria for determining the nature of those services. TNT Post's specific grounds of challenge were rejected, but it did achieve a partial success in that the Court of Justice held that the UK VAT exemption, which was challenged by TNT Post, was overbroad. In the light of the judgment, Parliament was required to limit the scope of the VAT exemption and did so by the amendment to which I have referred.
98. In these circumstances, I see nothing contrary to principle, or unjust, in permitting a party to amend its claim so as to take advantage of a judgment of the Court of Justice that has clarified EU law. I do not see how a party could be shut out from bringing a fresh claim to take advantage of such a ruling from Luxembourg, and proceeding by way of amendment to an existing claim is often more convenient and less costly, and causes the defendant no real prejudice.
99. In the present context it is worth remembering that any other postal operator, including an operator in another Member State, could have brought a claim against the UK, relying upon the judgment in TNT. It would be somewhat paradoxical to allow such a claim by another operator, but to preclude TNT Post, whose efforts had brought the issue before the Court of Justice, from bringing a fresh claim, or amending its original claim, on the ground only that its specific arguments had been rejected by the Court of Justice.
100. HMRC's final argument is that the claim for damages, which is the purpose of the amendment, is not arguable, and permission should be refused.
101. To succeed on its claim for damages TNT Post would have to show that the UK, in maintaining an overbroad UK VAT exemption, 'manifestly and gravely exceeded the limits of its discretion' (Brasserie du Pêcheur SA v Germany and R v Secretary of State for Transport, ex parte Factortame (cases C-46 and 48/93) [1996] ECR1-1029 (paragraph 55). In assessing the gravity of the breach 'the clarity and precision of the rule breached' is an important consideration (ibid, para 56). On this test it seems to me that such a claim is not arguable. The UK VAT exemption had been in place for many years. TNT Post challenged that exemption only because of a regulatory change in 2006 that in fact had no bearing on the lawfulness of the UK VAT exemption as it stood. TNT Post did not at that time contend that the meaning of the EU VAT exemption was abundantly clear and that the UK was in flagrant violation of EU law because the exemption extended beyond postal services that were supplied by the USP in its capacity as such. As shown above, TNT Post's arguments at the time were entirely different.
102. Furthermore, the very language of the EU VAT exemption was extremely broad ('the supply by the public postal services of services'), and implementation across Member States was in disarray. The views of the Member States which took part in the proceedings before the Court of Justice differed considerably. The spectrum of opinion ranged from agreement with the United Kingdom's practice (based on a literal interpretation of the Directive) to rejection of any exemption in a liberalised market. The EU Commission had already brought Treaty infringement proceedings against three Member States, in some cases because they did not apply the exemption, and in others because they extended the exemption too far (see the Opinion of the Advocate General, paragraph 3). The United Kingdom, Germany, Greece, Finland, Sweden and the Commission thought that liberalisation and the abolition of reserved services had no bearing on the applicability of the exemption, notwithstanding the fact that a different Advocate General in another case had reached the opposite conclusion (see the Opinion of the Advocate General, paragraph 28). A number of Member States (wrongly) considered the EU Postal Directive to be irrelevant to the interpretation of the EU VAT exemption (see the Opinion of the Advocate General, paragraph 48). The United Kingdom, Greece and Ireland stood together in the contention that the exemption, on its plain wording, extended to all services supplied by the USP, whether or not the USP was acting in its capacity as such (see the Opinion of the Advocate General, paragraph 68).
103. The truth of the matter is that the United Kingdom, having regard to the wide language of the EU VAT exemption, adopted an interpretation that was reasonably tenable and that was adopted by other Member States. There were other reasonably tenable interpretations that gave a narrower scope to the exemption. There was no jurisprudence of the Court of Justice that shed light on the correct interpretation of the exemption. The reference in TNT to the Court of Justice was indeed necessary to achieve clarity and certainty, as TNT Post, among others, contended at the time. The guiding principle in the end identified by the Court of Justice was far from obvious. The United Kingdom was in a difficult position because it had a duty (not just a power) to apply the exemption to its full lawful extent, and an unduly narrow interpretation, in apparent tension with the plain language of the exemption, carried the risk of unlawfully causing prejudice not only to Royal Mail but to those enterprises, both postal operators and business users, who at the time benefited from the exemption. It should be remembered that many business users supply VAT exempt services and any input VAT paid on the acquisition of postal services would not have been recoverable.
104. In short, a Member State cannot arguably be at sufficiently serious fault in misapplying EU law when, among other reasonable interpretations, it has adopted an interpretation of that law which was reasonably tenable at the time and which was supported by other Member States, and when the guiding principle for the correct interpretation was far from obvious and ultimately required ascertainment by the Court of Justice on a reference expressly for that purpose. Accordingly, I refuse the application to amend.

Conclusion

105. For the reasons set out earlier I conclude that, following the judgment in TNT, the United Kingdom amended the relevant VAT legislation in a way that was compatible with EU law, and the current UK VAT exemption is likewise compatible with EU Law.