Judges J Malenovský, M Safjan, D Šváby, M Vilaras (Rapporteur)
Advocate General M Bobek
The taxpayer was engaged in the manufacture and sale of cosmetics. Their retail sale was carried out through independent representatives, almost all of whom were not subject to value added tax (“VAT”). The taxpayer sold the goods to the representatives at a price below the retail price envisaged by it and were subject to VAT but since the representatives were not accountable for VAT, the retail sales which they made were not subject to VAT. The effect of that system was that the difference between the retail selling price and the price paid by the representatives to the taxpayer was not subject to VAT. To remedy that situation, the Finance Act 1977 granted the Revenue and Customs Commissioners (“the commissioners”) the power to issue persons liable to pay VAT with directions so that the tax payable by them would be calculated by reference to the retail selling price. In accordance with article 27(5) of Sixth Council Directive 77/388/EEC (as amended), the United Kingdom notified the Commission of the European Communities of that measure, as a special derogating measure, within the meaning of article 27(1). Council Decision 89/534/EEC granted the United Kingdom permission to derogate from article 11A(1)(a) of the Sixth Directive with the aim of avoiding non-taxation at the stage of final consumption. The taxpayer brought proceedings for the refund of VAT totalling in the region of £14m on the ground that the system of taxation which was applicable to it, on the basis of the individual notice, did not take into account the tax relating to the cost of the representatives’ purchase of demonstration items, which were intended to help them to increase their sale volumes and are sold to them by it at a discount greater than that applied to the other products. By an interlocutory decision, the First-tier Tribunal (Tax) [2014] UKFTT 172 (TC) held that the terms in which Decision 89/534 was couched, reproduced in paragraph 2 of Schedule 6 of the Value Added Tax Act 1994 did not permit account to be taken of the tax paid by the representatives in respect of the purchase of the demonstration items. Since the tribunal took the view that that provision reproduced the terms of Decision 89/534 and had doubts as to its validity in the light in particular of the principle of fiscal neutrality, it stayed the proceedings and referred questions for preliminary ruling.
On the reference—
Held, (1) articles 17 and 27 of Sixth Council Directive 77/388/EEC, as amended, did not preclude a measure authorised by Council Decision 89/534/EEC authorising the United Kingdom to apply, in respect of certain supplies to unregistered resellers, a measure derogating from article 11A(1)(a) of the Sixth Directive, under which the taxable amount for valued added tax (VAT) purposes of a direct sales company was the open market value of the goods sold at the stage of final consumption, where those goods were marketed through re-sellers not subject to VAT, even if that derogating measure did not take account of the input VAT relating to demonstration items purchased by those re-sellers from that company (judgment, para 43, operative part, para 1).
(2) Inasmuch as the derogating measure in Decision 89/534 authorised the United Kingdom to charge VAT on sales of a direct sales company’s products to final consumers made by non-taxable re-sellers, by determining the taxable amount of that company in the light of the open market value of the goods sold by those re-sellers, it enabled the loss of tax revenue resulting from such a marketing structure to be avoided. Such a measure therefore appeared appropriate for attaining the objective of combating tax avoidance and Decision 89/534 did not go beyond what was necessary in order to attain the objective of combating tax avoidance. The principle of fiscal neutrality precluded, in particular, treating similar goods or supplies of services, which were thus in competition with each other, differently for VAT purposes. The failure of Decision 89/534 to take account of the input VAT relating to demonstration items purchased by non-taxable re-sellers from a direct sales company resulted in the distribution chain of that company’s products bearing a greater VAT burden than its competitors’ products. However, such a circumstance was merely the consequence of the choice made by such a company to use the direct selling system to market its products. Accordingly, the principle of fiscal neutrality could not be interpreted as authorising that VAT to be taken into account in the taxable amount of the supplies referred to in article 1 of Decision 89/534 (judgment, paras 47, 51–54, 56, operative part, para 2).
(2) Article 27 of Sixth Directive 77/388 did not require the member state which sought authorisation to derogate from article 11A(1)(a) to inform the European Commission that non-taxable re-sellers incurred VAT on purchases of demonstration items from a direct sales company that were used for the purposes of their economic activity, in order that account be taken, in one way or another, of that input tax in the detailed rules of the derogating measure (judgment, para 69, operative part, para 3).
Roderick Cordara QC and David Scorey QC (instructed by Pinsent Masons llp) for the taxpayer.
Melanie Hall QC (instructed by The Treasury Solicitor) for the United Kingdom Government.
J Bauerschmidt, E Moro and E Chatziioakeimidou, agents, for the Council of the European Union.
L Lozano Palacios, R Lyal and A Lewis, agents, for the European Commission.