DECISION
1.
At a hearing of this appeal in December 2010 we heard argument on two
issues. One of those (the compound interest issue) was whether there existed
an EU right to compound interest, and if so whether such a right could be
enforced in this tribunal under the statutory scheme in the Value Added Tax Act
1994 (“VATA”). The other (the pre-1978 supplies issue), to which we now return
in this decision, was whether commission earned by mail order agents in respect
of purchases by third party customers (referred to as “3PP commission”), which
was credited to the agents’ accounts with mail order companies in the Grattan
group, and received by the agents in cash or by way of credit against a debit
balance in the account, gave rise to a retrospective reduction in the value of
the supplies made by the mail order companies prior to 1 January 1978, the date
from which the Sixth VAT Directive superseded the Second Directive.
2.
We released our decision on 12 January 2011; [2011] UKFTT 31 (TC). We
found that under domestic law – s 10(2) of the Finance Act 1972 – the
consideration for the mail order supplies could not be reduced by the 3PP
commission taken in cash. That issue therefore depended on the existence of a
directly-applicable EU right. We could not with complete confidence determine
that there was such a right, and accordingly we referred that question to the
Court of Justice of the European Union (“CJEU”).
Our reference to the CJEU
3.
In consequence of our decision, we released directions on 26 May 2011
for the transmission to the CJEU of a request for a preliminary ruling. The
question referred was as follows:
“In relation to the period before 1 January 1978,
does a taxable person have a directly effective right under Article 8(a) of the
Second Council Directive of 11 April 1967 (67/228/EEC), and/or the principles
of fiscal neutrality and of equal treatment, to treat the basis of assessment
of a supply of goods as retrospectively reduced where, after the time of that
supply of goods, the recipient of the supply received a credit from the
supplier which the recipient then elected either to take as a payment of money,
or as a credit against amounts owed to the supplier in respect of supplies of
goods to the recipient that had already taken place.”
4.
After describing the way in which commission (or credits) could arise
both in respect of an agent’s own purchases (“AOP”) and in respect of purchases
made by third party customers through the agent (“3PP”), and that the dispute
concerned only the 3PP commission, the reference went on to refer to the
dispute as concerning whether the commissions paid or credited reduced the
taxable amount of the supplies of goods by the mail order companies to the
agents. There is a clear theme running through the reference, including in the
submissions of the parties recorded in the reference, that although the
commission arose as a result of both AOP and 3PP purchases, what is in issue is
the value of supplies made by the mail order companies to the agent, and not
supplies made by the mail order companies to the third party customer.
The CJEU’s judgment
5.
In the CJEU, the case (C-310/11; [2013] STC 502) was one in which the Court
had the assistance of an opinion of the Advocate-General (Kokott) issued on 13
September 2012. The judgment of the Court was released on 19 December 2012.
6.
In its judgment, the Court referred to the question referred to it by
this tribunal. At [19] the Court described the essence of that question in the
following way:
“By its question, the referring tribunal asks, in
essence, whether art 8(a) of the Second Directive must be interpreted as
conferring upon a taxable person the right to treat the basis of assessment of
a supply of goods as retrospectively reduced where, after the time of that
supply of goods, an agent received a credit from the supplier which the agent
elected to take either as a payment of money or as a credit against amounts
owed to the supplier in respect of supplies of goods that had already taken
place.”
7.
In reaching its conclusion on this question the Court focused on the issue
of whether any adjustment could be retrospective. It found that there was
nothing in the Second Directive that provided for the chargeable event, that is
the event giving rise to the tax, to be set at a subsequent time or otherwise
deferred. Nor did the directive provide for the alteration of a tax debt that
had already arisen. Accordingly, as the Advocate-General had observed in her
opinion, a taxable person’s debt arose in an amount derived from the basis of
assessment, a basis that was to be determined at the time of delivery
(judgment, [24] to [26]).
8.
The conclusion, stated at [27] was as follows:
“Therefore, neither art 8(a) nor any other article
of the Second Directive could be interpreted as meaning that regularisation of
the basis of assessment, or of the output tax, after delivery—which is when the
chargeable event took place—had to be permitted.”
9.
Were the argument to have been confined to the effect of article 8(a) of
the Second Directive, there would be no remaining dispute. For supplies prior
to 1 January 1978, the commissions paid in cash could not have resulted in an
adjustment to the value of taxable supplies that had already been made. But
the question referred had also asked whether the principles of fiscal
neutrality and/or equal treatment would, either in conjunction with article
8(a) or on their own, require such an adjustment to be made. That question was
dealt with by the Court, at [28] to [31], as follows:
“28. As regards, next, the principle of fiscal
neutrality, it is to be noted that this principle, which constitutes a
fundamental principle of the common system of VAT, is the reflection in the
field of VAT of the principle of equal treatment (see, to this effect, Marks
& Spencer plc v Revenue and Customs Comrs (Case C-309/06) [2008] STC 1408,
[2008] ECR I-2283, para 47). One of the consequences of this principle is that
taxable persons must not be treated differently in respect of similar supplies
which are in competition with each other (see, to this effect, Solleveld v
Staatssecretaris van Financien (Cases C-443/04 and C-444/04) [2007] STC 71,
[2006] ECR I-3617, para 39 and the case law cited).
29. The principle of fiscal neutrality is not a rule
of primary law which enables on its own the basis of assessment within the
meaning of art 8(a) of the Second Directive to be determined (see, to this
effect, Finanzamt Steglitz v Zimmermann (Case C-174/11) (15
November 2012, unreported), para 50 and the case law cited). Nor can it make up
for the fact that the Second Directive does not include any provision
comparable to art 11C(1) of the Sixth Directive.
30. Under the same principle in its other sense, the
amount of VAT to be collected by the tax authority must correspond exactly to
the amount of VAT declared on the invoice and paid by the final consumer to the
taxable person (Fiscale eenheid Koninklijke Ahold NV v
Staatssecretaris van Financiën (Case C-484/06) [2009] STC 45,
[2008] ECR I-5097, para 36 and the case law cited).
31. It is clear from the documents submitted to the
court that, in the main proceedings, sub-customers, as the final consumers of
the goods, had to pay the catalogue price for the goods which they purchased
and did not receive any commission from the company. The commission was in fact
required to be paid back to the agent and not to the sub-customer. In those
circumstances, and by virtue of the principles recalled in the preceding
paragraph, it must be held that the consideration for the supply corresponded
to the full unreduced catalogue price and that the basis of assessment was
therefore that price.”
10.
Finally, the Court addressed an argument submitted by Grattan that
having regard to the continuity of the VAT system there should be no
distinction between the positions before and after 1 January 1978. This
argument was dismissed on the basis that the degree of harmonisation under the Second
and Sixth Directives was not comparable, the Sixth Directive having harmonised
the concepts of chargeable event, chargeability to tax and taxable amount. It
was under the Sixth Directive that the EU legislature had adopted art 11C(1),
which introduced the conditions under which the taxable amount will be reduced
retrospectively. There was no equivalent provision in the Second Directive
(judgment, [32] to [36]).
11.
The ruling of the CJEU was expressed in the following terms:
“Article 8(a) of EC Council Directive 67/228 of 11
April 1967 on the harmonisation of legislation of member states concerning
turnover taxes—structure and procedures for application of the common system of
value added tax must be interpreted as not conferring upon a taxable person the
right to treat the basis of assessment of a supply of goods as retrospectively
reduced where, after the time of that supply of goods, an agent received a
credit from the supplier which the agent elected to take either as a payment of
money or as a credit against amounts owed to the supplier in respect of
supplies of goods that had already taken place.”
Fiscal neutrality
12.
Grattan accepts that the CJEU has decided that it cannot rely on the
Second Directive. It also accepts that the reasoning in the judgment disposes
of Grattan’s arguments concerning the continuity of the VAT system.
13.
That leaves the question of fiscal neutrality. In that connection, for
Grattan, Dr Lasok submitted that, properly understood, the judgment meant that the
principle of fiscal neutrality, in the sense described by the CJEU in [30],
namely that the amount of VAT must correspond exactly to the amount of VAT
declared on the invoice and paid by the final consumer to the taxable person,
has the effect, independently of the Second Directive, of requiring a
retrospective adjustment to the value of taxable supplies made by the mail
order companies to the agents. Accordingly, Dr Lasok submits that the appeal
in this respect should therefore be allowed.
14.
It will be apparent from our summary of the CJEU’s judgment, and this
was common ground, that the CJEU referred to the principle of fiscal
neutrality, firstly in the sense of the principle of equal treatment, and
secondly in the sense of ensuring the neutrality of the tax burden. Where the
parties essentially differ is in the interpretation of what the CJEU said at
[29].
15.
For Grattan, Dr Lasok says that the finding of the CJEU that the
principle of fiscal neutrality is not a rule of primary law that by itself
enables the basis of assessment to be determined, and that it cannot make up
for the absence of specific provision in the Second Directive is confined to
the first – equal treatment – sense of the principle of fiscal neutrality, and
does not apply to that principle in its neutral tax burden sense.
16.
Mr Mantle for HMRC submits, to the contrary, that it is clear that the
CJEU has decided in its judgment that the principle of fiscal neutrality in all
or any of its senses does not enable the basis of assessment to be addressed on
its own. Accordingly, whether looking at equal treatment or neutral tax
burden, the principle does not independently give any right to a retrospective
reduction in the basis of assessment.
The structural argument
17.
Dr Lasok argued that the structure and reasoning of the CJEU’s judgment
supported his reasoning. He submitted that if the Court had considered that
the principle of fiscal neutrality in its neutral tax burden sense had been
subject to what it had said in [29], the order of paragraphs [29] and [30]
would have been reversed, and [31] would not have appeared in the judgment; the
operation of the principle of fiscal neutrality in both senses would have been
disposed of for the reason stated in [29]. There is, by contrast, no reference
in [31] to the principle set out in [29].
18.
Dr Lasok went on to submit that by necessary implication from the
reasoning of the CJEU, the Court believed that the principle of fiscal
neutrality, in the neutral tax burden sense, was indeed applicable (as the
principle in the equal treatment sense was not), independently of the Second
Directive. Otherwise, argued Mr Lasok, paragraph [31] of the judgment did not
make any sense at all. If the principle in that sense, as well as in the equal
treatment sense, had no independent effect, the matter would be settled by what
the Court had said at [29], and [31] would be redundant.
19.
We do not accept Dr Lasok’s argument in this respect. In our view there
is nothing in the structure of the judgment that would lead us to conclude
that, where it stated at [29] that the principle of fiscal neutrality is not a
rule of primary law that enables the basis of assessment to be determined, that
must be understood as limited to the principle in its equal treatment sense.
The Court does not confine its consideration in [29] to any particular aspect
of the principle, and we do not consider that, if the Court had intended to
draw the principled distinction between the effects of the two different senses
of the principle of fiscal neutrality, it would have chosen to do so otherwise
that by plain words.
20.
Nor do we accept that, if paragraph [29] is to be construed in this way,
paragraph [31] would make no sense or be redundant. The inclusion of an
observation by the Court to the effect that the principle of fiscal neutrality
in its neutral tax burden sense could not in any event have enabled there to be
a reduction in the consideration for the supplies by the mail order companies
to the third party “sub-customers” is, in our view, explicable in terms of the
principle being an aid to interpretation of the Directive, and nothing more. In
making this observation, the Court was doing no more than echoing the view
adopted by the Advocate-General at [31] of her opinion, where, in considering
whether the 3PP commissions could reduce the taxable consideration in respect
of sales to the third party customers, the Advocate-General expressed the view
that it is the full purchase price that forms the basis of assessment. That is
an application of article 8(a) of the Second Directive, construed in accordance
with the principle of fiscal neutrality in its neutral tax burden sense, which
operates irrespective of the timing of the reduction in the value of the
taxable supply; it is therefore addressing a different point to that already
addressed at [29] which, in its reference to article 11C(1) of the Sixth
Directive, is dealing with retrospective adjustments.
21.
On the other hand, it was, as we have described above, clear from the
reference, and it was equally clear from the treatment of the question at [32]
and [33] of the Advocate-General’s opinion, where she expressed reservations as
to whether 3PP commission could reduce the consideration for the agent’s own
purchase, that there was an issue in respect of the commissions being treated
as reductions in the consideration for the agents’ own purchases. Looking only
at the structure of the judgment, it would seem unlikely, if the CJEU was
placing independent reliance on the neutral tax burden sense of the principle
of fiscal neutrality, and intended thereby to point out the significant
difference between the position of supplies to sub-customers and supplies to
agents, that it did not make that distinction entirely explicit.
22.
Our own conclusion on the structure of the judgment is that paragraph
[29] is to be regarded as a general statement of the nature of the principle of
fiscal neutrality in both the senses of that principle described by the Court.
The reference in [31] to the effect of the principle in its neutral tax burden
sense in assessing the consideration for particular supplies made by the mail
order companies to sub-customers, who do not receive the commissions, is
explicable as a separate application of article 8(a) interpreted by reference
to the principle of fiscal neutrality in its neutral tax burden sense and does
not carry with it any implication that the principle could be applied, on a
free-standing basis, so as to permit retrospective adjustments to the value of
the taxable supplies made by the mail order companies to the agents.
Substance of the CJEU judgment
23.
Mr Lasok’s second argument in support of his submission that the
principle of fiscal neutrality in its neutral tax burden sense was not confined
by [29] of the judgment was that this followed from a consideration of the
source of the principle in that sense.
24.
Before turning to that, however, we consider it appropriate first to
analyse the basis for what the CJEU said at [29]. In remarking that the
principle of fiscal neutrality is not a rule of primary law that can make up
for the absence of a relevant provision in a Directive, the Court referred to
the judgment of the CJEU in Finanzamt Steglitz v Ines Zimmerman (Case
C-174/11; 15 November 2012, unreported), referring in particular to [50] and
the case law cited in that paragraph.
25.
Zimmerman was a case concerning the exemption for goods and
services closely linked to welfare and social security work under article
13(A)(1)(g) of the Sixth Directive. One of the issues considered by the CJEU
was the application of the principle of fiscal neutrality in its equal
treatment sense. The Court discussed the principle of fiscal neutrality in the
following terms:
“46. In relation to these points, it should be borne
in mind that, in the field of VAT, the concept of neutrality is used in
different senses.
47. On the one hand, recalling that the deduction
mechanism provided for under the sixth Directive is intended to relieve the
trader entirely of the burden of the VAT payable or paid in the course of all
his economic activities, the Court has held that the common system of VAT seeks
to ensure neutrality of taxation of all economic activities, provided that
those activities are themselves subject to VAT (see inter alia, to that effect,
Case C-174/08 NCC Construction Danmark [2009] ECR I-10567, paragraph 27,
and Case C-277/09 RBS Deutschland Holdings [2010] ECR I-13805, paragraph
38).
48. On the other hand, according to settled
case-law, the principle of fiscal neutrality means that supplies of goods or
services which are similar, and which are accordingly in competition with each
other, may not be treated differently for VAT purposes (see, inter alia, Joined
Cases C-453/02 and C-462/02 Linneweber and Akritidis [2005] ECR I-1131,
paragraph 24, and Joined Cases C-259/10 and C-260/10 Rank Group [2011]
ECR I-0000, paragraph 32 and the case-law cited).
49. It is in that latter sense that the concept of
neutrality is relevant in the present case. As is clear from the case-law set
out in paragraph 22 above, in the interpretation of the exemptions provided for
under Article 13 of the sixth Directive, the principle of fiscal neutrality
must be applied alongside the principle that those exemptions must be
interpreted strictly (see also, to that effect, Case C-44/11, Deutsche Bank
[2012] ECR I-0000, paragraph 45).
50. From that viewpoint, it should be borne in mind
that the principle of fiscal neutrality – a particular expression of the
principle of equal treatment at the level of secondary EU law and in the
specific area of taxation (see, to that effect, NCC Construction Danmark,
paragraph 44) – is not a rule of primary law against which it is possible to
test the validity of an exemption provided for under Article 13 of the sixth
directive. Nor does the principle make it possible for the scope of such an
exemption to be extended in the absence of an unequivocal provision to that
effect (see, to that effect, VDP Dental Laboratory, paragraphs 35 to 37,
and Deutsche Bank, paragraph 45).”
26.
In Zimmerman, the Court referred to the case of NCC
Construction Danmark A/S v Skatteministeriet (Case C-174/08) [2010] STC
532, both as authority for the existence of the principle of fiscal neutrality
in its neutral tax burden sense, and also in relation to it being an expression
of the principle of equal treatment at the level of secondary EU law.
27.
The relevant passage from the judgment in NCC Construction is
that at [39] to [43] as follows:
“39. First of all, it should be noted that the
principle of fiscal neutrality resulting from the provisions of art 17(2) of
the Sixth Directive implies that a taxable person may deduct all the VAT levied
on goods and services acquired for the exercise of his taxable activities (see,
to that effect, Nordania Finans A/S v Skatteministeriet (Case C-98/07) [2008] STC 3314,
[2008] ECR I-1281, para 19).
40. In that regard, it is necessary to add that,
according to settled case law, the principle of fiscal neutrality, and, in
particular, the right to deduct, as an integral part of the VAT scheme, is a
fundamental principle underlying the common system of VAT established by the
relevant Community legislation (see Sosnowska v Dyrektor Izby Skarbowej we
Wroclawiu Osrodek Zamiejscowy w Walbrzychu (Case C-25/07) [2008] ECR I-5129, paras 14 and 15, and PARAT Automotive Cabrio Textiltetoket Gyarto
Kft v Ado – es Penzugyi Ellenorzesi Hivatal Hatosagi Foosztaly
Eszak-magyarorszagi Kihelyezett Hatosagi Osztaly (Case C-74/08) [2009] All ER (D) 215 (Apr),
para 15).
41. That principle of fiscal neutrality was intended
by the Community legislature to reflect, in matters relating to VAT, the
general principle of equal treatment (see, to that effect, Marks &
Spencer plc v Revenue and Customs Comrs (Case C-309/06) [2008] STC 1408,
[2008] ECR I-2283, para 49, and the case law cited).
42. However, while that latter principle, like the
other general principles of Community law, has constitutional status, the
principle of fiscal neutrality requires legislation to be drafted and enacted,
which requires a measure of secondary Community law (see, by analogy, with
regard to the protection of minority shareholders, Audiolux SA v Groupe
Bruxelles Lambert SA (GBL) (Case C-101/08) [2009] All ER (D) 236 (Oct),
para 63).
43. The principle of fiscal neutrality may, consequently,
be the subject, in such a legislative measure, of detailed rules, such as
those, implemented in Danish law, resulting from the application of art 19(1)
in conjunction with art 28(3)(b) of the Sixth Directive, and point 16 of Annex
F to that directive, according to which a taxable person carrying out both
taxable activities and exempt activities of selling real estate cannot deduct
fully the VAT on its general costs.”
28.
We analyse the judgment of the Court in NCC Construction in the
following way. At [39], the Court referred to the principle of fiscal
neutrality in the neutral tax burden sense. At [40] it described the principle
in that particular sense, and the right to deduct VAT levied on goods and
services acquired by a taxable person for the exercise of his taxable
activities, as a “fundamental principle underlying the common system of VAT
established by the relevant Community legislation”. Then, at [41], remarking
on the principle in the sense in which it had described it at [40], the Court stated
that the principle was intended by the Community legislature to reflect, in
matters relating to VAT, the general principle of equal treatment. But it went
on to say, at [42], that whilst the general principle of equal treatment, in
common with the other general principles of Community law, has constitutional
status, the principle of fiscal neutrality requires legislation to be drafted
and enacted, which requires a measure of secondary Community law. That
principle, by which in this context the Court is referring to the principle of
fiscal neutrality in its neutral tax burden sense, may consequently be subject
to detailed rules (see [43]).
29.
From this passage it is clear that the Court, in referring to the
principle of fiscal neutrality as a constitutional principle which is given
effect only through the enactment of legislation, requiring secondary Community
law, was considering the principle in its neutral tax burden sense. It is only
later, at [44], that the Court in NCC Construction went on to refer to
the principle in its equal treatment sense of precluding taxable persons from
being treated differently in respect of similar supplies that are in
competition with one another. Whilst member states must take into account the
principles of equal treatment in implementing the applicable directive, NCC Construction
makes it clear that the principle finds its expression through the directive,
and not independently.
30.
Dr Lasok argued that NCC Construction was a case concerning the
principle of fiscal neutrality, not in its neutral tax burden sense, but in its
equal treatment form. We accept that it was equal treatment that was directly in
issue in NCC Construction, but in our view that cannot detract from the
analysis undertaken by the Court on the status of the principle of fiscal
neutrality generally. It is clear in our view from NCC Construction,
and from the references in Zimmerman and Grattan, at [29], that
in analysing the principle of fiscal neutrality as a constitutional principle,
and not as a rule of primary law which by itself can determine the basis of
assessment, the Court draws no distinction between the different expressions of
that principle.
31.
On the basis of the authorities referred to in [29] of Grattan,
we find no support for Dr Lasok’s argument. We turn then to consider the
authorities cited by the Court at [30], the paragraph dealing specifically with
the principle of fiscal neutrality in its neutral tax burden sense.
32.
At [30] of the judgment in Grattan, as authority for the
principle of fiscal neutrality in its neutral tax burden sense, the CJEU
referred to Fiscale eeinheid Koninklijke Ahold NV v Staatssecretaris van
Financiën (Case C-484/06) [2009] STC 45, at [36] and the case law cited in
that paragraph. The Ahold case included the question whether the VAT
directives entailed a specific obligation that member states must permit
taxable persons to adopt a method of rounding down the VAT element of
consideration for taxable supplies on an item by item basis. (The taxpayer was
a supermarket chain which claimed it had overpaid VAT by instead using a system
of rounding based on the till receipts of customers, comprising several items.)
The Court in Ahold considered whether the principle of neutrality (and
the principle of proportionality) could impose such an obligation on member
states. At [36] the Court said:
“One of the consequences of the principle of fiscal
neutrality, which is the reflection in the field of VAT of the principle of
equal treatment, is that taxable persons must not be treated differently, with
regard to the method of rounding applied when VAT is calculated, in respect of
similar services which are in competition with each other (see, to that effect,
Solleveld v Staatssecretaris van Financien (Cases C-443/04 and C-444/04) [2007] STC 71,
[2006] ECR I-3617, para 35 and case law there cited). By virtue of the same
principle, the amount of VAT to be collected by the tax authority must
correspond exactly to the amount of VAT declared on the invoice and paid by the
final consumer to the taxable person (see, to that effect, Elida Gibbs Ltd v
Customs and Excise Comrs (Case C–317/94) [1996] STC 1387, [1997] QB 499, para
24).”
33.
Two questions were considered in Ahold. The first question was
whether the issue was a matter solely of domestic law; the Court ruled that, in
the absence of specific Community legislation, it was for the member states to
decide on the rules and methods for rounding amounts of VAT, but that the
states were bound, when making that decision, to observe the principles
underpinning the common system of VAT, in particular those of fiscal neutrality
and proportionality. At [36] the Court was considering the second question,
namely whether, if the matter was one of Community law, member states were required
by the VAT directives to permit item by item rounding.
34.
It was in the context of its answer to the first question that the Court
approached the second question. It found, at [37], that the principle of
fiscal neutrality did not entail any requirement that a particular method of
rounding be applied, in a case where the method chosen by the member state
ensures that the amount of VAT to be collected by the tax authority corresponds
exactly to the amount of VAT declared on the invoice and paid by the final
consumer to the taxable person.
35.
Ahold therefore is authority for the two emanations of the
principle of fiscal neutrality; that of equal treatment and that of neutral tax
burden, that are described in Grattan. But we do not accept Dr Lasok’s
description of [36] in Ahold as drawing a distinction between the two
expressions of that principle; it does nothing more than describe them.
Instead, the Court, at [37], goes on to refer to the principle in an
undifferentiated form, which Mr Mantle argued supports the analysis that no
such differentiation is to be inferred from the judgment in Grattan.
With respect to the competing arguments, we do not consider that anything can
be derived from Ahold that can assist us on the question whether Grattan
is authority for a different approach being taken for the two ways in which the
principle of fiscal neutrality may be expressed. That was not a question that
was required to be addressed in Ahold, and we do not consider that the
way in which the Court expressed itself in that case is any guide in this
respect.
36.
On the other hand, we do regard Ahold as providing some
assistance in our consideration of the submission by Dr Lasok that [29] of the
judgment in Grattan is confined to the equal treatment element of the
principle of fiscal neutrality because equal treatment, being concerned with
the treatment of a supply or a supplier by reference to another supply or
supplier, does not enable the basis of assessment to be determined. The
rounding methodology in Ahold was an element of the basis of assessment,
and the Court (at [36]) regarded the principle of neutrality as relevant to
that methodology. We do not therefore accept Dr Lasok’s argument that the
Court in Grattan, at [29], was intending to refer only to the principle of
fiscal neutrality in its equal treatment sense. In both its equal treatment
and neutral tax burden senses, that principle was capable, to the extent
indicated by the case law, of bearing upon the question of the basis of
assessment.
37.
The case cited in [36] of Ahold, and to which therefore the Court
in Grattan referred when identifying the principle of fiscal neutrality
in its neutral tax burden sense, is Elida Gibbs Ltd v Customs and Excise
Commissioners (Case C-317/94) [1996] STC 1387. In that case, the essential
question was whether money refunded, in the case of “money-off” coupons by the
manufacturer to the retailer, and in the case of “cash-back coupons” by the
manufacturer to the consumer, constituted a retrospective discount reducing the
manufacturer’s price for the goods so that pursuant to article 11C(1) of the
Sixth Directive the taxable amount should be reduced accordingly.
38.
At [36] of Ahold, the specific reference is to [24] of the
judgment in Elida Gibbs. At that paragraph the Court in Ahold
summarised the position as being that the tax authorities may not in any
circumstances charge an amount exceeding the tax paid by the final consumer.
To put this conclusion in context, however, it is necessary to consider the
immediately preceding passage, commencing with [19], where the Court described
the basic principle of the VAT system and how it operates:
“19. The basic principle of the VAT system is that
it is intended to tax only the final consumer. Consequently the taxable amount
serving as a basis for the VAT to be collected by the tax authorities cannot
exceed the consideration actually paid by the final consumer which is the basis
for calculating the VAT ultimately borne by him.
20. Thus in Staatssecretaris van Financiën v Hong
Kong Trade Development Council (Case 89/81) [1982] ECR 1277 at 1285, para 6
the court held that it was apparent from EC Council Directive 67/227 of 11
April 1967 on the harmonisation of the legislation of the member states
concerning turnover tax (the First Directive) (JO 71 14.4.67 p 1301 (S Edn 1967
p 14)) that one of the principles on which the VAT system was based was
neutrality, in the sense that within each country similar goods should bear the
same tax burden whatever the length of the production and distribution chain.
21. That basic principle clarifies the role and
obligations of taxable persons within the machinery established for the collection
of VAT.
22. It is not, in fact, the taxable persons who
themselves bear the burden of VAT. The sole requirement imposed on them, when
they take part in the production and distribution process prior to the stage of
final taxation, regardless of the number of transactions involved, is that, at
each stage of the process, they collect the tax on behalf of the tax
authorities and account for it to them.
23. In order to guarantee complete neutrality of the
machinery as far as taxable persons are concerned, the Sixth Directive
provides, in Title XI, for a system of deductions designed to ensure that the
taxable person is not improperly charged VAT. As the court held in its judgment
in Gaston Schul Douane Expediteur BV v Inspecteur der Invoerrechten en Accijnzen,
Roosendaal (Case 15/81) [1982] ECR 1409 at 1426, para 10, a basic feature
of the VAT system is that VAT is chargeable on each transaction only after
deduction of the amount of VAT borne directly by the cost of the various price
components of the goods and services. The procedure for deduction is so
arranged that only taxable persons are authorised to deduct from the VAT for
which they are liable the VAT which the goods and services have already borne.”
39.
Dr Lasok submitted that the neutral tax burden embodiment of the
principle of fiscal neutrality should be regarded as an independent principle,
which operated therefore on its own, and which should therefore be applied as
such to the facts of this case. He based this submission on an argument that the
principal of neutrality in its neutral tax burden sense was derived from an
obligation of primary legislation. The legislation in question was the First
Directive, as referred to in [20] of Ahold, specifically in this context
article 2 of that directive. On this footing he argued the principle of
neutrality in its neutral tax burden sense should properly be regarded as a
rule of primary EU law and accordingly that the ordinary and natural
interpretation of the CJEU’s judgment in Grattan is that paragraph [30]
of that judgment must be applied unless, according to [31], the only
transaction that is relevant to the supply is the supply to the sub-customer
and the sub-customer is paying the full catalogue price.
40.
We do not accept this analysis. In our judgment is it not supported by Grattan
or by Elida Gibbs. It is clear from Elida Gibbs, at [23], that
it is the directives that give effect to the principles on which the VAT system
is based. The directives are the means of giving effect to those principles, and
the principles themselves do not have independent effect. It is not the case
that it was article 2 of the First Directive that gave rise to the principle of
fiscal neutrality in its neutral tax burden sense; it was that principle which
was embodied, at that time to the limited extent of harmonisation determined by
the member states, in article 2 of the First Directive and subsequently in
Article 8(a) of the Second Directive and in the relevant provisions of the
Sixth Directive and, currently, the Principal VAT Directive. Neither article 2
of the First Directive nor article 1 of that directive, which required member
states to replace their present systems of turnover taxes by the common system
of VAT defined in article 2, was the fountainhead of the principle. Article 2 of
the First Directive was the means adopted at that stage, and at the level of
harmonisation then applicable, to enable neutrality to be achieved. That
article, in common with the corresponding provisions of subsequent directives,
was the machinery adopted to reflect the principle of fiscal neutrality at the
evolving stages of harmonisation; the principle on its own cannot provide any
different or additional machinery.
41.
That this is the correct analysis is confirmed by the way in which the
Court in Elida Gibbs described its approach to the questions it had to
address as to the effect on the taxable amount of the types of coupons it had
been asked to consider. At [28] the Court referred to the need for conformity
with the Sixth Directive in order to comply with the principle of neutrality,
and at [30] to its interpretation of Article 11A(1)(a) of that directive being
borne out by Article 11C(1). It is evident, as Mr Mantle submitted, that the
approach of the Court in Elida Gibbs was by way of interpretation of the
Sixth Directive by reference to the principle of fiscal neutrality and not by
independent application of that principle in any of its elements, including
that of neutral tax burden.
42.
The analysis is also supported by the discussion by the Court in Grattan,
at [33], of the lack of comparability of the degree of harmonisation under the
Second and Sixth Directives, where the Court remarked on the fact that the
First Directive did not at that stage include definitive rules in various respects,
and in particular included no uniform basis of assessment.
43.
It follows from this that we do not accept Dr Lasok’s argument that to
fail to give effect to the principle of fiscal neutrality in its neutral tax
burden sense, independently of Article 8(a) of the Second Directive, is to
accept that the First Directive and the Second Directive impose on member
states mutually inconsistent obligations. The only obligations imposed on the
member states were those contained in the directives. The interpretation of
those directives, and the way in which they are implemented by the member
states, must take into account the fundamental principles of the VAT system,
including the principle of fiscal neutrality, both in the sense of equal
treatment and that of neutral tax burden. But those principles are given
effect only by the directives, as so interpreted and applied, and it is
therefore according to the provisions of the directives that the basis of
assessment falls to be determined. There is nothing in the authorities to cast
any doubt on the clear meaning to be given to what the Court in Grattan said
at [30], namely that the principle of fiscal neutrality, in every sense, is not
a rule of primary law which enables on its own the basis of assessment within the
meaning of article 8(a) of the Second Directive to be determined.
44.
We reach this conclusion on our own analysis of the relevant case law
and without reference to the opinion of Advocate General Kokott in Grattan
on this issue. But we can respectfully say that that opinion wholly supports our
own conclusion. The Advocate General took the view, at [49] to [51] of her
opinion, that the degree of harmonisation under the Second and Sixth Directives
could not be compared, that it was only with the Sixth Directive that there was
comprehensive harmonisation of the uniform basis of assessment and that
consequently the Second Directive does not provide for a retrospective
reduction of the basis of assessment. She addressed the principle of fiscal
neutrality, in its neutral tax burden sense, in the following way (at [52] to
54]):
“52. Furthermore, observance of the principle of
fiscal neutrality does not lead to any other conclusion.
53. This principle is admittedly not [,] contrary to
the United Kingdom government's submissions, merely a reflection of the
principle of equality. In addition to this meaning, the court also uses the
principle of neutrality in the sense of a neutral tax burden, which protects
the taxable person, since the common system of VAT is intended to tax only the
final consumer.
54. In this variant of meaning, however, the
principle of neutrality has no authority which transcends the legislation.
It may therefore be used as an aid to interpretation in case of doubt, but may
not extend or restrict the provisions of the applicable VAT directive.
Thus, in particular it cannot compensate for the fact that the Second Directive
does not contain any provision comparable to art 11C(1) of the Sixth Directive.”
45.
That, in our respectful view, is an accurate summary of the EU
jurisprudence on this issue. Despite Dr Lasok’s submissions to the contrary,
we do not consider that there is any tension between what the Advocate General
said in this regard and the judgment of the Court in Grattan. We have
no doubt that if the Court had intended to adopt a different approach from that
of the Advocate General, and had decided that the principle of fiscal
neutrality in the neutral tax burden sense did indeed transcend the legislation
in the form of article 8(a) of the Second Directive, it would have said as much
in clear terms, particularly since such a finding would have been the direct
opposite of the opinion expressed so clearly by the Advocate General. That the
Court did not do so is explained, in our view, by the clear and consistent
thread running through the cases that the principle of fiscal neutrality as a
whole does not have independent effect, a thread that has been adopted and
maintained by the judgment of the Court in Grattan.
Application to the facts
46.
It was common ground that if we were to find that the CJEU in Grattan
had decided that the principle of fiscal neutrality in its neutral tax burden
sense had no independent application to the basis of assessment, the ruling of
the Court that article 8(a) of the Second Directive did not allow the basis of
assessment to be retrospectively reduced in the circumstances of the 3PP
commissions in this case would be determinative, and that this part of
Grattan’s appeal would fall to be dismissed.
47.
That is our finding. The parties agreed at the hearing that we would
decide this issue of principle, and proceed to consider the application of the
CJEU’s judgment to the facts of this case only if we had reached the opposite
conclusion. In view of our decision, we need take that exercise no further.
Decision
48.
We dismiss Grattan’s appeal on the pre-1978 supplies issue.
Application for permission to appeal
49.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
ROGER BERNER
TRIBUNAL JUDGE
RELEASE DATE: 11 September 2013
