In the Vat and Duties Tribunal

18783

In the vat and duties tribunal

centre: london

Between

Appellants

-and-

Respondents

Tribunal: Dr. J. Avery Jones (Chairman)

Sitting in Chambers in London on 16 August 2004

DIRECTION

IT IS DIRECTED THAT:

(1)the questions set out in the Request for a Preliminary Ruling of the Court of Justice of the European Communities attached hereto as Schedule A be referred to the Court of Justice of the European Communities for a preliminary ruling pursuant to Article 234 EC for the reasons set out therein and by reference to the Agreed Statement of Facts attached hereto as ScheduleB;

(2)all further proceedings in this appeal be stayed, with liberty to apply, until the said Court of Justice of the European Communities has given its preliminary ruling on the said questions or until further Order.

Release Date: 24 August 2004

SCHEDULE A

REQUEST FOR A PRELIMINARY RULING OF THE COURT OF JUSTICE OF THE EUROPEAN COMMUNITIES UNDER ARTICLE 234 OF THE EC TREATY

1.Introduction

1.1This request for a preliminary ruling arises in the context of appeals to the VAT and Duties Tribunal (the Tribunal) brought by the Appellants against certain decisions of the Respondents. Each of the Appellants had submitted claims for the recovery of a total of some £3,347,698,000 (equivalent to some €5,009,274,000 as of 2 July 2004) value added tax (VAT) claimed by them to have been paid on the grant to them by way of an auction (the Auction), by the Secretary of State for Trade and Industry (the Secretary of State), of Third Generation Mobile Communications Licences (the Licences) in 2000. The Respondents rejected the Appellants’ claims to deduct these amounts from the VAT collected by the Appellants on their taxable supplies. In brief, the Respondents rejected the Appellants’ claims on the basis that no VAT was deductible because the grant of the Licences was not subject to VAT.

1.2After considering the arguments of the parties, the Tribunal has concluded that in order to enable it to decide those appeals it is necessary to resolve various questions concerning the interpretation of European Community law and therefore that it is appropriate to request the Court of Justice of the European Communities to make a preliminary ruling on those questions.

2.The Parties

2.1Each of the Appellants is registered for VAT either individually or as a member of a group registration. They, or the group of which they are a member, make or intend to make taxable supplies of telecommunications services. The first, third, fourth and fifth Appellants (Hutchison 3G UK Limited, Orange 3G Limited, T-Mobile (UK) Limited and Vodafone Group Services Limited) are represented in these proceedings by Linklaters, Solicitors and by Paul Lasok QC, and may be contacted at Linklaters, One Silk Street, London, EC2Y 8HQ, England, Tel: (44-20) 7456 2000, Fax: (44-20) 7456 2222. The second Appellant (mmO2 Plc) is represented in these proceedings by Freshfields Bruckhaus Deringer, Solicitors, and by Roderick Cordara QC, and may be contacted at Freshfields Bruckhaus Deringer, 65 Fleet Street, London, EC4Y 1HS, England, Tel: (44-20) 7936 4000, Fax: (44-20) 7832 7001.

2.2The Respondents are responsible for the care and management of VAT in the United Kingdom. They are represented in these proceedings by the Solicitor to the Commissioners of Customs and Excise and by Kenneth Parker QC and George Peretz, Barrister, and may be contacted at the Solicitor to the Commissioners of Customs and Excise, New King’s Beam House, 22 Upper Ground, London SE1 9PJ, tel.: (44) 870 785 8053, fax.: (44) 870 785 8169.

3.Factual Background

3.1The factual background is set out in the Agreed Statement of Facts attached to this Direction as Schedule B, which should be considered an integral part of this request for a preliminary ruling.

4.Summary of the Arguments of the Parties

4.1A summary of the arguments of the parties is set out below. The arguments of the parties will be fully developed in their Observations to the Court of Justice of the European Communities.

Articles 4(1) and 4(2) of the Sixth Directive

4.2Article4(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment (the Sixth Directive)[1] defines “taxable person” to mean:

“any person who independently carries out … any economic activity specified in paragraph 2, whatever the purpose or results of that activity”.

4.3Article4(2) includes within the concept of “economic activities” the activities of “persons supplying services”.

4.4The Appellants contend that the Auction and grant of the Licences by the Secretary of State was an economic activity within the meaning of Articles4(1) and 4(2).

4.5The Appellants’ principal arguments in this regard are set out below.

4.5.1The question as to whether an activity is an “economic activity” for the purposes of Articles4(1) and 4(2) is determined by reference to its inherent nature.[2] The purpose and objectives of the Secretary of State are irrelevant (or, if they are held to be relevant, the Appellants’ own purpose, as well as that of the Secretary of State, is relevant).[3]

4.5.2The Auction and grant of the Licences was an economic activity in particular because of: the nature of the Licences (the Appellants contend that they amounted to the sale to businesses of the right to use part of a scarce resource for business purposes, the scarcity of the resource being enhanced by the way in which the Auction and the Licences were configured); the financial consideration obtained for them (the Appellants contend that the aim was to make a profit and the revenue generated by the Auction was available to be used by the Government for its general purposes unconnected with the 3G telecommunications market); the way in which the Licences were configured and granted and the financial consideration determined (the Appellants contend that the design and implementation of the Auction, which was the first held in the EU, were such as to realise the maximum, or close to the maximum, value available to the Government from the sale of the Licences, causing the United Kingdom to receive a disproportionately large share of the funds available to invest in 3G licences in the EU). The Appellants contend that the public statements and actions of the Government confirmed the foregoing.

4.5.3Articles4(1) and (2) do not exclude “regulatory” activities per se from the concept of “economic activity”. The Appellants do not accept the Respondents’ contention that Directive 97/13/EC (the Licensing Directive)[4] (and in particular Article 11 thereof) and/or Decision 128/1999/EC (the UMTS Decision)[5] (collectively referred to as the Community provisions), are relevant to the characterisation for VAT purposes of the activities of the Secretary of State, either per se or insofar as the Secretary of State’s activities in connection with the Auction complied therewith or insofar as United Kingdom legislation sought to comply therewith. If any of the Community provisions are held to be relevant, the Appellants do not accept, merely on the unsupported assertion of the Respondents, that: (i) the activities of the Secretary of State either did not need to comply or in fact complied with the Licensing Directive; (ii) the United Kingdom legislation in fact complied with the Community provisions; (iii) the authors of the Licensing Directive recognised that the Auction was an appropriate way to optimise the allocation of the spectrum; and (iv) the Auction operated to impose charges which reflect the need to ensure the optimal use of the spectrum or took into particular account the need to foster the development of innovative services and competition.

4.6If the Secretary of State is held (whether by virtue of having a mixed purpose or on other grounds) to have been carrying out activities which were partly “economic activities” for the purposes of Articles4(1) and (2) and partly not, the Appellants submit that the whole, or substantially the whole, amount of the consideration paid for the Licences falls to be treated as the taxable amount.

4.7The Respondents contend, in essence, by reference inter alia to cases such as Case C-364/92, Eurocontrol [1994] ECR I-43, that, in the circumstances set out in the Agreed Statement of Facts, the activity of the Secretary of State in awarding the Licences in the context of the relevant legislative framework (including the Licensing Directive and the UMTS Decision as well as UK legislation, that is to say, the Wireless Telegraphy Acts 1949 and 1998 and legislation made under them, which sought, inter alia, to implement those Community provisions) cannot be classified as an “economic activity” under Article 4(1) and (2) but rather constitutes an exercise of the sovereign authority of the State in regulating use of the spectrum. Doing so by way of auction could (putting the argument at its lowest) reasonably be regarded as a way of achieving the Government’s objectives, as recorded in the Ministerial statement to Parliament of 18 May 1998, of achieving, for the long-term benefit of UK consumers and the national economy, the timely and economically advantageous development and sustained provision of UMTS services in the UK, and, subject to that overall aim, (i)utilising the available UMTS spectrum with optimum efficiency; (ii)promoting effective and sustainable competition for the provision of UMTS services; and (iii)subject to the above objectives, designing an auction which was best judged to realise the full economic value to consumers, industry and the taxpayer of the spectrum.

Article 4(5) of the Sixth Directive

4.8Article 4(5) provides that:

“States, regional and local government authorities and other bodiesgoverned by public law shall not be considered taxable persons inrespect of the activities or transactions in which they engage as publicauthorities, even where they collect dues, fees, contributions orpayments in connection withthese activities or transactions.

However, when they engage in such activities or transactions, theyshall be considered taxable persons in respect of these activities ortransactions where treatment as non-taxable persons would lead tosignificant distortions of competition.

In any case, these bodies shall be considered taxable persons in relationto the activities listed in Annex D, provided they are not carried out onsucha small scale as to be negligible.

Member States may consider activities of these bodies which areexempt under Article 13 or 28 as activities which they engage in aspublic authorities.”

First sub-paragraph of Article4(5) - acting as a public authority

4.9The Appellants contend that the first sub-paragraph of Article4(5) sets out a limited exception to the basic rule in Article4(1). The exception applies (subject to the two limitations set out in the second and third sub-paragraphs of Article4(5)) to activities and transactions in which States, regional and local government authorities and other bodies governed by public law engage “as public authorities”.

4.10The Appellants contend that the Secretary of State cannot be said to have acted “as a public authority” within the meaning of the first sub-paragraph of Article4(5). Bodies governed by public law engage in activities “as public authorities” within the meaning of that provision when they do so under the special legal regime applicable to them. On the other hand, when they act under the same legal conditions as those that apply to private traders, they cannot be regarded as acting “as public authorities”.[6]

4.11Even if the issuing of the Licences could be regarded as being in some respects a “non-economic” activity or in some respects as being carried out by the Secretary of State in his capacity as a public authority acting as such, it was in other respects an economic activity carried out by the Secretary of State in his capacity as a taxable person. Further, if the Secretary of State is held (on whatever basis) to have been acting partly “as a public authority” and partly not, the Appellants submit that none of the consideration for the grant of the Licences, or, in the alternative, only a proportion of the consideration equal to the administrative costs incurred in granting the Licences (appropriately apportioned among the Licences), should be treated as consideration for a supply by the Secretary of State acting as a public authority.

4.12The Appellants do not consider that the Community provisions (see paragraph 4.5.3 above) are any more relevant to the question as to whether the Secretary of State was acting as a public authority for the purposes of the first sub-paragraph of Article4(5) than to the “economic activity” issue considered at paragraph 4.5.3 above. Moreover, the Appellants contend that the Secretary of State acted under a national statutory framework which was entirely or substantially permissive and imposed no conditions or obligations upon the Secretary of State that would differentiate the legal conditions under which he acted from those applying to private traders[7] (so that any conditions and obligations governing the Auction and grant of the Licences were imposed by the Secretary of State upon himself). The effect of the national statutory regime was to allow the Secretary of State to replicate the private law regime of an open market auction.

4.13The Respondents maintain in essence that, in the circumstances set out in the Agreed Statement of Facts, the Secretary of State plainly was acting as a public authority, since his activities were governed by public law and under a special legal regime that does not apply to private operators (Case 446/98, Fazenda Publica v Camara Municipal do Porto [2000] ECR I-11435). The Respondents contend that the legislative framework governing the Secretary of State’s activities in regulating use of the spectrum plainly did not apply to private operators; no private operator has power to authorise or regulate the use of the spectrum pursuant to the Wireless Telegraphy Acts 1949 and 1998, which made it a criminal offence to use the electro-magnetic spectrum save where an exemption applied or by persons holding a licence granted by the Secretary of State, and which also, the Respondents contend, constituted the public law regime under which the Secretary of State acted at all material times.

Second sub-paragraph of Article4(5) - distortion of competition

4.14The Appellants contend that the limitation in the second sub-paragraph of Article4(5) based on “distortion of competition” (which reflects or ought to be construed and applied consistently with the principle of fiscal neutrality) applies where treating the Secretary of State as a non-taxable person (i)would, or (ii)could or (iii)might lead to significant distortions of competition either immediately or in the future. They contend that this is the correct “distortion of competition” test, following the approach of the Court of Justice of the European Communities in paragraph64 of its judgment in Assurandør-Societetet, acting on behalf of Taksatorringen v Skatteministeriet (CaseC8/01) in relation to the construction of similar language in Article13A(1)(f) of the Sixth Directive. In this connection, the Appellants contend that neither the scheme and context of the Sixth Directive nor the different language versions of Articles4(5) and 13A justify the application of a different “distortion of competition” test in the Article4(5) context from that held by the Court of Justice of the European Communities to apply in the Article13A context. There is no European authority explaining how the “distortion of competition” test in the second sub-paragraph of Article4(5) is to be applied.

4.15The Appellants contend that a qualifying risk of distortion arises from, inter alia, the proposed introduction of secondary trading in spectrum in the future alongside continuing primary assignments by the Secretary of State. A person wishing to acquire rights in relation to the use of 3G equipment or spectrum would be charged VAT on the acquisition of such rights in the secondary market but would not (if the Respondents are correct) be charged VAT on the acquisition of such rights from the Secretary of State. The tax treatment of similar supplies would therefore (if the Respondents are right) be different. The Appellants contend that, putting it at its lowest, the cash flow implications of acquiring high value rights on a taxable basis can be substantial. In addition, it cannot be assumed that all participants in a liberalised spectrum market would be able fully to recover their input tax. The Appellants contend that spectrum trading was not prohibited in principle by EC legislation at the time of the Auction and assert that it was permitted as a matter of fact by a number of Member States (subject to regulatory approval). Accordingly, the Appellants assert that the second sub-paragraph of Article4(5) prevents the Secretary of State from being treated as a non-taxable person.

4.16The Respondents maintain that the Appellants have not raised any plausible argument to the effect that any significant distortion of competition would arise as a result of treatment of the Secretary of State’s activities as non-taxable. They contend, inter alia, that: -

4.16.1even if at some future time there were to be some form of “competition” between secondary trading in rights and (unspecified) “continuing assignments” of rights by the Secretary of State, that hypothetical possibility of future competition cannot affect the analysis of whether treatment of the Secretary of State’s activities as non-taxable at the material time (when there was on any view no such “competition”) would cause any significant distortion of competition; and

4.16.2The Appellants have not identified, let alone provided economic evidence to support their contentions as to, the market in which competition is said to be significantly distorted by treating the Secretary of State’s activity of granting the Licences as non-taxable, nor produced any evidence that competition would thereby be significantly distorted in any such market (bearing in mind, for example, the obvious point (as the Respondents contend) that purchasers on any such market would be able to reclaim as input tax any VAT chargeable on supplies by private operators).

Third sub-paragraph of Article4(5) and AnnexD - telecommunications

4.17The Appellants assert that the activities of the Secretary of State in auctioning off and granting the Licences fall within the third sub-paragraph of Article4(5) because they fall to be treated as “telecommunications” within the meaning of AnnexD to the Sixth Directive.

4.18The Appellants contend that the term “telecommunications” in Annex D has a broad and general meaning and there is no reason to limit the scope of the term. The Appellants submit that their contention for this wide interpretation of “telecommunications” in Annex D is supported by the broad definition of “telecommunications” that is included in Article9(2)(e) of the Sixth Directive.

4.19The Appellants also assert that the term “telecommunications” in Annex D includes the sale by a government organ of a Member State of licences permitting the use of telecommunications equipment in defined parts of the electro-magnetic spectrum for commercial purposes in the context of the liberalisation by that government of the market in electro-magnetic spectrum from state control or monopoly.