InIsle of Wight Council and others v HMRC[2015] EWCA Civ 1303 (16 December 2015), the Court of Appeal upheld the Upper Tribunal’s finding that the non-taxation of off-street car parking (OSCP) to local authorities would lead to significant distortions of competition.
The issue was whether a local authority which charges members of the public for OSCP is a non-taxable person for VAT purposes. This turned on whether treating the authority as a non-taxable person ‘would lead to significant distortions of competition’ under the Sixth VAT Directive Art 4.5(2) (replaced by the Principal VAT Directive Art 13).
The interpretation of the provision had been referred to the ECJ, which had found that:
· the significant distortions of competition must be evaluated by reference to the activity in question, without reference to any local market in particular;
· the prohibition concerns not only actual competition, but also potential competition, provided that the possibility of a private operator entering the relevant market is real and not purely hypothetical; and
· the word ‘significant’ means that the actual or potential distortions of competition must be more than negligible.
On remittance of the case back to the UK courts, both the UT and the FTT had found that the non-taxation of OSCP by local authorities would distort competition.
The Court of Appeal observed that when local authorities fix OSCP charges so as to give effect to traffic management, planning, economic and environmental objectives, it is entirely lawful and correct of them to have regard to the overall constraints of meeting the cost of providing OSCP (except that they can charge more than cost for some specific relevant policy objectives). Consequently, the absence of any liability of local authorities to pay VAT on OSCP charges would permit local authorities to meet the cost of providing OSCP while charging less to those using that facility.
Furthermore, the Court of Appeal accepted the finding of the FTT that the downward pressure on OSCP charges – resulting from the wish of local authorities to contribute to the economic vitality of their areas through charging that does not deter shoppers, and the unpopularity of car parking charges – would have caused charges to be set at a lower level than in circumstances of taxation by a margin approaching the VAT fraction. Non-taxation by local authorities would therefore lead to significant distortion of competition.
Why it matters: The Court of Appeal rejected the submission both that the general fund of a local authority is an undifferentiated fund, out of which many activities are financed, and that it is at the local authority's discretion how the funds no longer required to pay VAT on OSCP charges would be expended. Such a submission was based on the scenario of an existing fund budgeted to meet VAT, but which was no longer required to meet that liability. The correct approach was a hypothetical one in which there never was, and no one ever thought there was, a VAT liability.
InIsle of Wight Council and others v HMRC[2015] EWCA Civ 1303 (16 December 2015), the Court of Appeal upheld the Upper Tribunal’s finding that the non-taxation of off-street car parking (OSCP) to local authorities would lead to significant distortions of competition.
The issue was whether a local authority which charges members of the public for OSCP is a non-taxable person for VAT purposes. This turned on whether treating the authority as a non-taxable person ‘would lead to significant distortions of competition’ under the Sixth VAT Directive Art 4.5(2) (replaced by the Principal VAT Directive Art 13).
The interpretation of the provision had been referred to the ECJ, which had found that:
· the significant distortions of competition must be evaluated by reference to the activity in question, without reference to any local market in particular;
· the prohibition concerns not only actual competition, but also potential competition, provided that the possibility of a private operator entering the relevant market is real and not purely hypothetical; and
· the word ‘significant’ means that the actual or potential distortions of competition must be more than negligible.
On remittance of the case back to the UK courts, both the UT and the FTT had found that the non-taxation of OSCP by local authorities would distort competition.
The Court of Appeal observed that when local authorities fix OSCP charges so as to give effect to traffic management, planning, economic and environmental objectives, it is entirely lawful and correct of them to have regard to the overall constraints of meeting the cost of providing OSCP (except that they can charge more than cost for some specific relevant policy objectives). Consequently, the absence of any liability of local authorities to pay VAT on OSCP charges would permit local authorities to meet the cost of providing OSCP while charging less to those using that facility.
Furthermore, the Court of Appeal accepted the finding of the FTT that the downward pressure on OSCP charges – resulting from the wish of local authorities to contribute to the economic vitality of their areas through charging that does not deter shoppers, and the unpopularity of car parking charges – would have caused charges to be set at a lower level than in circumstances of taxation by a margin approaching the VAT fraction. Non-taxation by local authorities would therefore lead to significant distortion of competition.
Why it matters: The Court of Appeal rejected the submission both that the general fund of a local authority is an undifferentiated fund, out of which many activities are financed, and that it is at the local authority's discretion how the funds no longer required to pay VAT on OSCP charges would be expended. Such a submission was based on the scenario of an existing fund budgeted to meet VAT, but which was no longer required to meet that liability. The correct approach was a hypothetical one in which there never was, and no one ever thought there was, a VAT liability.
