Here be dragons
‘If regulations are not clear and orders are not thoroughly explained, it is the commander’s fault.’
(Sun Tzu quoted in the Shih Chi (‘Records of the Grand Historian’) by Ssu–ma Ch’ien)
Last August HMRC published a revised version of its Litigation and Settlement Strategy (a wonderful document which refers to ‘customer’ 26 times in five pages and tells us that HMRC has a ‘customer-centric’ business strategy). We are also told that one of the central themes of the LSS is to choose cases for their wider impact, as well as for their value. Hold that thought (and you’ll need to try especially hard) while I tell you a tale of derring-do.
First, the combatants: HMRC and Able UK Limited a company that supplied ship-decommissioning services to the US Government and, as part of that service, dismantled ships formerly used by the US Navy. That dismantling took place in the UK.
Next, the rules of engagement:
An EU directive is interpreted in accordance with principles developed by the European Court. The basic rule of interpretation was stated in Sociedad General de Autores y Editores de España v Rafael Hoteles SA.
‘… in interpreting a provision of Community law it is necessary to consider not only its wording, but also the context in which it occurs and the objectives pursued by the rules of which it is part...’
This is known as ‘purposive’ construction and is different to the approach taken by a UK court in interpreting a provision of UK law (other than one implementing EU law), where there is a presumption that the literal meaning of the words applies and recourse is had to pre-legislative materials only where the provision is ambiguous or obscure or where giving it its literal meaning would lead to an absurd result.
A skirmish developed between Able and HMRC over the question of whether Able’s dismantling services met the criteria in article 151(1)(c) of Directive 2006/112/EC for exemption from VAT. To be exempt the services had to be supplied within the UK (a party to the NATO treaty) and be intended ‘either for the armed forces of other States party to that Treaty for the use of those forces, or of the civilian staff accompanying them, or for supplying their messes or canteens when such forces take part in the common defence effort’. If they were not, they were subject to VAT at the standard rate. Article 151(1)(c) was the fiscal equivalent of uncharted waters.
The preliminary skirmish soon escalated into full-scale conflict and ended up before the First-tier Tribunal.
Able’s legal broadside was that the dismantling services fell within the plain wording of article 151(1)(c).
Never ones to abandon a sinking ship, however badly holed below the water-line, HMRC’s riposte was that the provision was to be construed purposively. The international obligations of NATO members required them to provide relief only in respect of supplies made to NATO visiting forces. This was to ensure that the host country did not receive a fiscal advantage from the presence of those forces. The exemption in article 151(1)(c) was therefore restricted to supplies to visiting NATO armed forces stationed or operating within the UK (even though it did not actually say so).
The First-tier tribunal considered that if the legislators had intended article 151(1)(c) to apply solely to visiting NATO forces, they would have said so expressly. Instead of running up the white flag, the bully boys at HMRC appealed to the Upper Tribunal.
Will HMRC’s appeal be scuppered and victory go to Able?
The case was referred to the European Court for its opinion so we’ll be waiting a while for the answer.
*** UPDATE – July 2013 ***
The European Court gave its decision in the Able case in April 2012 (without the benefit of an Opinion from the Advocate General).
The Court side-stepped an attempt to muddy the waters by highlighting an errant comma in the different language versions of article 151(1)(c) which, if given weight, could affect the provision’s meaning, and interpreted the provision in the light of its objective. On that basis the exemption applied only where the services were supplied to visiting NATO forces.
In June 2013, Able, having lost before the European Court, threw in the towel.
Tax lawyer specialising in business tax, SDLT and VAT