HM Revenue & Customs v Zurich Insurance Company

The appellant, Zurich Insurance Company (“ZIC”), is an insurance company established under the laws of Switzerland and having its head office there. It also has local branches established in many countries in the world, including the United Kingdom, but not, at least in the United Kingdom, as separate bodies corporate. I shall refer to the Head Office and the United Kingdom branch as “HO” and “UK” respectively. ZIC was concerned to introduce into its world-wide business a new financial accounting and reporting system (“the SAP-WW Programme”). This involved the installation of software called SAP and a particular configuration or template called Z-Core. For the purposes of such installation ZIC required the services of consultants. Accordingly it entered into a framework agreement, with effect from November 1997, with Price Waterhouse Management Consultants AG (“PwCAG”), a company registered in Switzerland, to provide those consultancy services.

The services of PwCAG for the purposes of the installation at the premises of UK were supplied pursuant to a series of work orders dated 27th and 28th August 1999. The relevant work was carried out at the premises of UK between January 1999 and August 2000. The consultancy services were supplied by PwCUK as the sub-contractor of PwCAG. The cost was invoiced by PwCUK to PwCAG, by PwCAG to Zurich Leben for HO and by HO to UK.

On 6th November 2002 the respondent, Her Majesty’s Commissioners for Revenue and Customs (“HMRC”), assessed ZIC to VAT at the standard rate on the supplies of services by PwCAG to ZIC under work orders 2 to 10 (both inclusive) in the sum of £2,085,153 on the footing that the place of such supply was the United Kingdom. The validity of that assessment depends on the proper interpretation and application of Article 9(2)(e) Sixth Council Directive on the harmonisation of the laws of Member States relating to turnover taxes (77/388/EEC) (“the Sixth Directive”). That article provides:

On 30th June 2005 the VAT and Duties Tribunal (Dr John Avery-Jones and Mr Cyril Shaw) set aside the assessment. For the reasons given in their decision of that date they considered that the place of supply was Zurich. HMRC appealed to the High Court, as permitted by s.11 Tribunals and Enquiries Act 1992. Park J, by whom the appeal was heard in February 2006, disagreed with the Tribunal. For the reasons given in his judgment handed down on 23rd March 2006 he considered that the place of supply was the United Kingdom. Accordingly he set aside the order of the Tribunal. This is the appeal of ZIC from the order of Park J.

The contentions of ZIC may be shortly summarised. ZIC points out that the right to appeal from the Tribunal to the High Court under s.11 Tribunals and Enquiries Act 1992 is conferred on a party “dissatisfied in point of law”. ZIC submits that Park J did not respect the limitation of the right of appeal to points of law but substituted his own findings of fact for those of the Tribunal and applied the provisions of Article 9(2)(e) to his findings rather than to theirs. ZIC submits that the Tribunal made no error of law and their decision should have been allowed to stand. Accordingly there are three issues for our determination: (1) whether Park J wrongly substituted his own view of the facts for that of the Tribunal, (2) whether the Tribunal erred in law so as to entitle Park J to reconsider their conclusion and (3) whether the conclusion of Park J is correct in point of law.

In those circumstances the starting point for the consideration of ZIC’s submissions must be the findings of fact made by the Tribunal. By their notice of appeal dated 5th December 2002 ZIC claimed that the place of supply of the services of PwCAG was Switzerland. Their grounds of appeal were further particularised on 12th January 2004 to submit that in the light of the decision of the ECJ in Berkholz v Finanzamt Hamburg-Mitte-Allstadt [1985] ECR 2251 (“Berkholz”), as applicable to questions arising under Article 9(2)(e), the place of supply was Switzerland because that is where the business of ZIC was established and a decision to that effect would not lead to an irrational result. The appeal of ZIC was supported by witness statements of Mr Bottome, the SAP-WW Programme manager between 1st January 1999 and 31st December 2000, Ms Stringer, the Project Director for both the five projects into which SAP-WW Programme was divided and the first of them which dealt specifically with UK Non-Life and Group Services and Mr Warner who had been the VAT manager of ZIC until his retirement in October 1999. Each of them produced voluminous exhibits, amounting in all to 7 lever arch files, and gave oral evidence to the Tribunal. No further evidence was adduced in behalf of HMRC. The appeal occupied the time of the Tribunal from 16th to 19th May 2005. The Tribunal’s decision was released on 30th June 2006.

In paragraphs 1 to 4 the Tribunal set out the issue they had to determine and other preliminary matters. Paragraph 5 contains the Tribunal’s findings of fact. It is divided into sub-paragraphs (1) to (23). In sub-paragraph (1) the Tribunal records that it was common ground that Zurich is the place where ZIC had established its business and the UK is a place where it has a fixed establishment, in each case, for the purposes of Article 9(2)(e).

In sub-paragraphs (2) to (4) the Tribunal set out the nature of the SAP project generally. I should quote parts of them for the explanations they provide. Thus in sub-paragraph (2) the Tribunal explained what SAP was, namely:

As the Tribunal recorded in sub-paragraph (3) the world-wide requirement for software was to be supplied by SAP and the hardware by IBM, in each case pursuant to contracts concluded in Switzerland. In sub-paragraphs (5) to (7) the Tribunal considered the world-wide implementation of the SAP-WW Project in 70 business units in 50 countries over a period of 2.5 years starting in October 1997. They described the chain of supervisory committees based in Switzerland ultimately responsible to the Executive Board of ZIC and the engagement of PwCAG. In respect of the services of PwCAG the Tribunal recorded that PwCAG had been engaged as consultants to the worldwide project under a framework agreement effective from 24 November 1997 (when they had started work) and governed by the law of Switzerland with exclusive jurisdiction given to the Courts in Zurich. The agreement stated the rates for work by PwCAG and other PwC entities. PwC staff were involved at all levels, two of them then based in Switzerland were members of the Implementation Steering Committee and also attended the Strategy Steering Committee as observers. Other PwC staff were appointed to all the overseeing bodies.

The Tribunal dealt with the implementation of the SAP-WW Project in the UK in sub-paragraphs (8) to (20). They described how at UK SAP replaced another system, OLAS, that had been performing similar functions satisfactorily since 1991 and was half way through being upgraded, but had to be abandoned in mid-1998 when the decision was made by HO to adopt SAP worldwide. They recorded that the change had been resisted by senior executives in the UK who were satisfied with OLAS. But as a consequence of a merger the number of employees of ZIC in the UK had increased from about 3,000 to about 21,000 and there were at least 20 different, and incompatible, business and accounting systems in operation in the UK. The problems were reviewed in a feasibility study report for the UKISA region (UK, Ireland and South Africa) made on 21st September 1998 (referred to in sub-paragraph (10)) which:

In sub-paragraphs (11) to (18) the Tribunal dealt at some length with the progress of the SAP-WW Project described in sub-paragraphs (19) and (20) in the following terms:

Following a change on which the Group Executive Board of ZIC decided on 21st September 1999 but to take effect from 1st January that year the system of invoicing for the services of PwCUK were, as described in sub-paragraph (22):

In paragraphs 6 to 9 the Tribunal set out the relevant parts of Article 9 and the contentions of the parties. In paragraphs 10 to 26 they set out the reasons for their conclusion stated in paragraph 27 that

Paragraphs 10 to 16 contain a consideration of the decisions of the ECJ in Berkholz, Commissioners of Customs and Excise v DFDS (Case C-260/95) [1997] STC 384 (“DFDS”) and RAL (Channel Islands) Ltd v Commissioners of Customs and Excise (Case C-452/03) [2005] STC 1025 (“RAL”). In paragraph 17 the Tribunal stated:

The Tribunal then considered the problem from the point of view of the place of contracting (paragraph 19), which location bore the cost (paragraph 20), what was done (paragraph 21) and for the benefit of which establishment, Zurich or the UK, the work was done (paragraphs 22 and 23). In the last mentioned context the Tribunal considered:

The Tribunal then tested their tentative conclusion for rationality and distortion of competition. They referred to two additional points on which counsel for HMRC had relied and confirmed their conclusion in paragraph 27 in terms I have already quoted. In those circumstances the Tribunal allowed the appeal of ZIC.

By their Appellant’s notice dated 19th August 2005 HMRC appealed from the order of the Tribunal. Their grounds of appeal, in summary, were that the Tribunal had (1) erred in law in failing properly or at all to apply the criteria set out in Berkholz, (2) erred in law in its application of DFDS, (3) erred in law in finding that the services were supplied to HO in Zurich and not UK in the United Kingdom and (4) erred in law in its assessment (for all or any of the six specified reasons) that treating Switzerland as the place of supply would give rise to an irrational result for tax purposes. There is no suggestion in the appellant’s notice or any of the written arguments that there was any appeal from any finding of primary fact. And with his unrivalled experience in this field it is, to say the least, unlikely that Park J could have considered that there was.

The papers for the hearing of the appeal were prepared by the Solicitor for HMRC in accordance with CPR PD52 para 5.6A(1). The bundles included the three witness statements to which I have referred and many, but not all, the extensive documents exhibited to them. At the hearing before Park J counsel for each party referred, without objection from counsel for the opposing party, to various parts of the evidence in order to illuminate or otherwise explain findings of the Tribunal.

In paragraphs 2 to 6 Park J summarised the relevant facts and the issues which arose. I should quote two passages. The first appears in paragraph 4 where Park J, having referred to the chain of invoices continued:

In paragraphs 7 to 13 Park J set out a summary of the facts necessary to explain his decision. Counsel for ZIC suggested that Park J may not have fully understood the difference between SAP and Z-Core. I do not accept this criticism. Park J set out verbatim passages from paragraphs 5(4) and (20), an explanatory document entitled “Getting Started”, the Feasibility Study to which I have referred and a specimen work order. He had been specifically referred to all those documents by counsel for one party without objection from counsel for the other. In any event, as he correctly observed in paragraph 10:

In paragraph 14 Park J criticised the Tribunal for not explaining the interaction of domestic law under VAT Act 1992 and the Sixth Directive. He proceeded to do so in paragraphs 14 to 29 before coming to the decision of the Tribunal. He started in paragraphs 14 and 15 by pointing out that the Sixth Directive takes priority over VAT Act in that:

Park J then referred to the relevant provisions of the Sixth Directive (paragraphs 16 and 17) and of the VAT Act (paragraph 18), concluding with some observations on each of them. In paragraph 24 he considered the three decisions of ECJ on which the Tribunal had concentrated, namely Berkholz, DFDS and RAL. In paragraphs 25 to 29 Park J returned to the position under the VAT Act apart from the Sixth Directive. In that connection he considered the application of the test imposed by s.9(4)(b) for the ascertainment of the place of supply of services by reference to “the establishment....at which or for the purposes of which the services are most directly used or to be used...”. In paragraph 27(iv) he concluded:

Park J concluded this section of his judgment by acknowledging that the place of supply rules in the Sixth Directive are critical because:

In paragraphs 30 to 56 Park J considered the decision of the Tribunal. After reviewing its approach Park J stated in paragraph 38:

In the succeeding paragraphs Park J explained his reasons for that conclusion. The principal reasons are those contained in paragraphs 39 and 40 which I should quote in full. Park J wrote:

In succeeding paragraphs Park J referred to other considerations which, in his view, led to the same conclusion. In paragraph 42 he dealt with the conclusion of the Tribunal in paragraph 22 of their Decision (see paragraph 15 above) that the work was done for the benefit of both establishments. He added:

In paragraphs 43 to 45 Park J criticised paragraph 24 of the Decision of the Tribunal in which they tested their prima facie conclusion that the place of supply was Switzerland by reference to rationality. He disagreed with their conclusion. Similarly in paragraphs 46 to 50 Park J considered the conclusions of the Tribunal when testing their prima facie view by the yardstick of distortion of competition. In paragraph 51 Park J reiterated that:

In paragraphs 52 to 54 Park J dealt with two points made by counsel for HMRC on which the Tribunal had placed little significance. In each case Park J thought there was more to the point than the Tribunal had recognised. It is not, I think, necessary to deal with either of them. The judge then referred in paragraphs 55 and 56 to two additional points as going to support his view. I need not refer to them either. His conclusion, as expressed in paragraph 57, was:

Counsel for ZIC contend that the decision on the place of supply of a service falling within Article 9(2)(e) is one of fact for the Tribunal so that the appellate courts may only interfere if the Tribunal has erred in law, including a conclusion which no reasonable tribunal could have reached. For this proposition they rely on the decision of Moses J in Commissioners for Customs and Excise v Chinese Channel (Hong Kong) Ltd [1998] STC 347. They point to various passages in the judgment of Park J which, they submit, show that he overlooked this limitation on his jurisdiction.

Counsel for HMRC accept, of course, that the jurisdiction of the appellate court is limited to errors of law as explained in Edwards v Bairstow [1956] AC 14. They suggest that Moses J might have gone further in Chinese Channel than the later decisions of the Court of Appeal in Commissioners of Customs and Excise v Westmoreland Motorway Services Ltd [1998] STC 431 and of the House of Lords in College of Estate Management v Commissioners of Customs and Excise [2005] STC 1597 warranted. But, in any event, so they submit, a careful reading of the judgment of Park J shows that he did not exceed his jurisdiction.

The starting point for any consideration of this issue is the decision of the House of Lords in Edwards v Bairstow [1956] AC 14. The issue in that case was whether the purchase and sale of specific machinery constituted an adventure in the nature of trade so as to justify an assessment to income tax under Case I of Schedule D. The primary facts were found by the General Commissioners who concluded that they did not constitute an adventure in the nature of trade. The appeal of the Inspector of Taxes was dismissed by both Wynn-Parry J and the Court of Appeal on the grounds that the determination of the General Commissioners was one of fact and was not perverse. The appeal of the Inspector of Taxes was allowed by the House of Lords on the ground that the primary facts found by the General Commissioners led inevitably to the conclusion that the transaction was an adventure in the nature of trade.

The classic statement of the law is to be found in the speech of Lord Radcliffe at page 36 in the following terms:

In Commissioners for Customs and Excise v Chinese Channel (Hong Kong) Ltd [1998] STC 347 Moses J was concerned with TV broadcasts emanating from Hong Kong transmitted by satellite to subscribers in Europe. It had established its place of business in Hong Kong. An associate company, CCTV, operated in the United Kingdom where it performed services for Chinese Channel. The issue was whether the supply of services by Chinese Channel to its subscribers in the UK should be treated as made in the UK for the purposes of s.9(2) and (5) of the VAT Act. The Commissioners considered that it was because CCTV was a branch or agency of Chinese Channel through which the latter had a fixed establishment in the UK. The Tribunal disagreed. They found that the supply was made from Hong Kong. The Commissioners appealed relying on the provisions of Article 9(1). Moses J considered the Tribunal’s factual conclusions at some length. At page 352 he recorded that:

As I read the judgment of Moses J his conclusion was based on a strict application of the principles of Edwards v Bairstow to the facts and circumstances of that case. I do not read the decision of the Court of Appeal in Commissioners of Customs and Excise v Westmoreland Motorway Services Ltd [1998] STC 431, 435h as suggesting any different test. However three recent decisions of the House of Lords indicate that at least in some areas a classification of goods or services for the purposes of VAT is a question of legal evaluation and therefore of law. Thus in Commissioners of Customs and Excise v British Telecommunications plc [1999] 1 WLR 1376, 1381 Lord Slynn of Hadley referred to the categorisation of a supply as single or split into two or more separate supplies as a matter of law. In Beynon v Commissioners of Customs and Excise [2005] 1 WLR 86, 93 paras 26 and 27 Lord Hoffmann agreed with the Court of Appeal that the categorisation of the supply as one of services or of goods and services was a question of law. To the like effect is the speech of Lord Walker of Gestingthorpe in College of Estate Management v Commissioners of Customs and Excise [2005] STC 1597, 1610 paras 35 and 36.

In both the latter cases Lords Hoffmann and Walker of Gestingthorpe emphasised the need for the appellate court to show circumspection before interfering with the decision of the Tribunal, even though it was on a point of law, “merely because it would have put the case on the other side of the line”. As in the case of the supply of goods and services so, in my view, in the case of the place of supply, the evaluation of the primary facts and the application to them of the provisions of Article 9 of the Sixth Directive as interpreted by the ECJ in cases such as Berkholz, DFDS and RAL is a matter of law. The appellate court is entitled to interfere but should show circumspection before doing so.

With those considerations in mind I turn to the submissions of counsel for ZIC. They complain that in a number of respects the judgment of Park J discloses an illegitimate approach. Into this category they put, particularly, paragraph 6 (quoted in paragraph 19 above), paragraph 27 (quoted in paragraph 22 above) and paragraph 38 (quoted in paragraph 24 above). They submit that these passages and others indicate a willingness on the part of Park J to question the conclusion of the Tribunal inconsistent with the limited jurisdiction he had. I do not agree. The authorities to which I have referred show that he was entitled, indeed bound, to question the conclusions of the Tribunal.

Counsel for ZIC also criticised the judge for going behind the Decision by referring to evidence before the Tribunal and before him. Into this category they put the passages to which I have referred in paragraph 20 above. These criticisms are, in my view, unfounded also. The documents in question had been referred to the judge by counsel without objection. Moreover they illuminate the conclusions of the Tribunal; they do not contradict them. The principal criticism lies in a comparison between paragraph 22 of the Decision of the Tribunal (quoted in paragraph 15 above) and paragraphs 13 and 42 of the judgment of Park J (quoted in paragraphs 20 and 26 above). In the former the Tribunal concluded that the services of PwCAG were for the benefit of both HO and UK in the latter Park J considered that they were “relevant to” UK and the installation of the new system in the premises of UK. But in reaching those conclusions Park J was not substituting findings of his own but reflecting in his own language findings of the Tribunal. I can see no harm in that.

The plain fact is that Park J applied the classic test laid down by the House of Lords in Edwards v Bairstow. In paragraph 27(iv) (quoted in paragraph 22 above) he referred to “the only” conclusion on the facts of the case. In paragraphs 38 and 51 (quoted in paragraphs 24 and 27) he referred to the “only tenable answer”. Having considered the judgment of Park J as a whole and the parts of it of which criticism was made I would reject the submission that he exceeded his jurisdiction.

This is the second issue to which I have referred in paragraph 5 above. The particular error isolated by Park J (in paragraph 38) was the identification by the Tribunal (in paragraph 23) of the place of contracting, namely Zurich, as the most important factor in determining the place of supply. The conclusion of the Tribunal goes back to their understanding of the opinion of the Advocate-General in DFDS as expressed in paragraph 13 of their Decision. In that paragraph the Tribunal stated:

DFDS was a company incorporated in Denmark which, amongst other activities, supplied package tours to its customers. Its English subsidiary sold the package tours as its parent’s general sales agent and central booking office. The package tours took their customers to many destinations outside both England and Denmark. The Commissioners for Customs and Excise assessed DFDS to VAT on the consideration paid by the customers for the package holidays on the basis that though its business was established in Denmark the supplies in question were made from a fixed establishment in the UK, namely the premises of the English subsidiary. DFDS contended that the place of supply was Denmark. Thus the choice for the purpose of the relevant provision in Article 26 was between the place where the supplier’s business had been established, namely Denmark, the fixed establishment provided by the English subsidiary in England. The Advocate-General chose England because that was the place of supply to the consumer and to choose Denmark would enable suppliers of services to alter the place of supply merely by moving its registered office.

The ECJ applied the reasoning of the Advocate-General. In paragraphs 20 to 24 the Court stated:

This reasoning cannot be transposed to the very different factual context afforded by this case. As Park J pointed out in paragraph 38 of his judgment:

Thus I turn to the third of the questions which I summarised in paragraph 5 above. Given that I have rejected the contention that Park J exceeded his jurisdiction in substituting his own findings of fact for those of the Tribunal and given that the place of contracting cannot be treated as of “most importance” there is little left in this appeal. It is not suggested that Park J was wrong in any part of his explanation of the relevant provisions of the VAT Act or the Sixth Directive or their interaction. It is common ground that the issue of the place of supply of the services of PwCAG, through PwCUK, under work orders 2 to 10 (both inclusive) must be determined by the application of Article 9(2)(e). It is also common ground that for the purposes of Article 9(2)(e) ZIC has established its business in Switzerland and has a fixed establishment in England.

Park J considered the provisions of the Sixth Directive and the decisions of the ECJ in Berkholz, DFDS and RAL at some length. From these he derived the approach to which he referred in paragraph 36 that Article 9(2)(e):

In paragraph 43 Park J recognised the need to test the choice of place of supply, particularly if it was the place of establishment of the business, by reference to rationality meaning in this context the avoidance of conflicts of jurisdiction, double taxation or non-taxation. I did not understand these approaches to be criticised by counsel for ZIC.

The criticism of counsel for ZIC is not to the approaches but to the outcome of their application. Was Park J entitled to reach the conclusion that he did? In my judgment he was. I agree with him that on the facts found by the Tribunal the only tenable outcome of the proper application of Article 9(2)(e) is the conclusion that the place of supply was the United Kingdom. I detect no error of law in the reasoning or conclusion of Park J.

For the reasons I have given I conclude that (1) Park J did not exceed his jurisdiction, (2) the conclusion of the Tribunal was vitiated by an error of law and (3) the decision of Park J was right for the reasons he gave. In these circumstances I would dismiss this appeal.

By virtue of section 8 and Schedule 5 of VATA, consultancy services are supplied where they are received and, if the recipient “belongs” in the United Kingdom, VAT is chargeable in the United Kingdom. By virtue of section 9(4) of VATA a recipient of services is treated as belonging in a country if, having an establishment both in that country and elsewhere, the establishment at which or for the purposes of which the services are most directly used (or to be used) is in that country. Zurich has its head office in Switzerland and a branch in the United Kingdom. Both the head office and the branch are establishments for the purpose of section 9 of VATA; the question therefore is which of the two is the establishment at which for the purpose of which PWC AG’s consulting services were most directly used.

It was common ground that this is the same question that arises under the Sixth Directive according to which VAT is chargeable at the place where a customer has established his business or has a fixed establishment to which the service is supplied. The cases decided by the European Court of Justice decide that services are supplied at an establishment in the form of the place of the registered office unless that conclusion is irrational and that the test of rationality is largely governed by considerations of economic reality. Since VAT cannot, by virtue of Article 1 of the Sixth Directive, be charged in circumstances which are not permitted by the Directive, the English legislation has to be read consistently with the Directive and it is for this reason that the courts have to decide to which of the two establishments it is more rational that VAT be charged. It is for that reason that the concept of rationality as developed in the European case law is the criterion by which to judge the question of where VAT is to be charged.

No challenge is made (or could be made) to the primary facts as found in paragraph 5 of the Tribunal’s reasoning. The combined effect of paragraphs 5(19) and 5(20) is that Zurich (HO) required the SAP to be installed in its local branches and that Zurich UK requested SAP for its financial reporting and accounting needs and, indeed, Zurich UK could not operate without the installation of SAP (or an equivalent). Moreover the implementation of SAP was carried out by Zurich UK staff (60% of the work force) and PWC UK staff (40% of the work staff) as a team working in Zurich UK premises. It thus appears that the installation services of the installers and the consultancy services of PWC AG were both received by Zurich UK in London.

The tribunal nevertheless paid less regard to the place where the consultancy services were rendered because they thought the question was not where the supply took place but who the customer was. In order to identify the customer they considered the place of contracting to be the most important factor. They regarded the place of benefit as the least important factor since neither of the two establishments benefited to the exclusion of the other.

It seems to me that there are two errors here. To focus on the identity of the customer begs the very question which has to be answered. The customer is Zurich Insurance Company, a company with its registered office and head office in Switzerland and a branch in London. If one asks who the customer is, it is natural to conclude that the customer is the Swiss corporate entity. But Article 9(2)(e) of the Sixth Directive requires one to focus on the place “where the customer has established his business or has a fixed establishment to which the service is supplied”. It is here agreed that the customer has two establishments; identifying the customer does not assist in determining the place where or to which it is more rational to say that the service has been supplied.

Secondly, whether one is seeking to identify the place where or to which the service is supplied on the one hand or one is seeking to identify the customer on the other, it cannot be right to say that the place of contracting is the most important factor. The place where a contract happens to be made is often adventitious. It will be important to ascertain which party is the offeror and which party is the offeree. Different rules apply, as a matter of English law, in the case of contracts made by post from those which apply in the case of instantaneous communication. For these reasons (among others), the place of contracting is usually regarded as unimportant in ascertaining the governing law of any contract, see Dicey and Morris, Conflict of Laws, 11th edition pages 1166-1167, 1209-1210 and Dicey Morris and Collins, Conflict of Laws, 14th edition para 32-003. It is equally unimportant in identifying the place to which a service is supplied.

Once these errors are established, the decision of the Tribunal cannot stand. If one then asks whether it is rational to say that the consultancy services in issue were supplied to Zurich HO in Switzerland where Zurich has established its business, there can only be one answer. For the reasons given by the judge and my Lords it is evident that it would be irrational to say that they were supplied to Zurich HO where the services were not performed and infinitely more rational to say that they were supplied to Zurich UK where they were performed.

For these reasons, I agree that the appeal should be dismissed.

I agree that the appeal should be dismissed.

The provisions of Article 9 of the Sixth VAT Directive dealing with the place of supply of services are not identical with those of sections 7 and 9 of the Value Added Tax 1994, and it is common ground that Zurich may rely on the relevant provisions of the Sixth Directive to the extent that they would avoid the reverse charge on supplies received from abroad. This is because (a) by virtue of the European Communities Act 1972, section 2, directly effective Community law rights are given effect in United Kingdom law; (b) wherever possible, national law should be construed in such a way as to be compatible with the provisions of the directive: Case C-106/89 Marleasing SA v La Comercial Internacional de Alimentacim SA [1990] ECR I-4135; (c) provisions of a directive which are sufficiently clear and precise, and which have not been implemented by the member state, may give rise to directly effective rights such that the Member State cannot rely on provisions of its national law which are incompatible with those rights; and (d) the provisions of Article 9 are of direct effect in that sense. See Marks and Spencer plc v Customs and Excise Commissioners [2003] EWCA Civ. 1448, [2004] STC 1, paras 10-11.

There have been several rulings by the European Court on Article 9, the most significant of which for the purposes of this appeal are Case 168/84 Berkholz v Finanzamt Hamburg-Mitte-Alstadt [1985] ECR 2251 and Case C-260/95 Customs and Excise Commissioners v DFDS A/S [1997] ECR I-1005, [1997] STC 384. Most of the decisions concern Article 9(1) and not the special rules in Article 9(2), but the relevant wording is identical and nothing turns in this appeal on the differences between the provisions.

The ruling in Case 168/84 Berkholz v Finanzamt Hamburg-Mitte-Alstadt [1985] ECR 2251 concerned the place of supply by a German company of gaming services on board a ship which sailed in Danish waters. One of the questions raised by the Finanzgericht was whether Article 9(1) should be interpreted to mean that the term “fixed establishment” also covered facilities for conducting a business (for example the operation of gaming machines) on board a ship sailing on the high seas outside the national territory, and, if so, what were the relevant criteria for the existence of a “fixed establishment”.

In answering the question the European Court said (paragraph 14):

Advocate General Mancini (page 2255) said that in determining which of the two main criteria laid down in Article 9(1) should be relied on where the place where the supplier had established his business did not coincide with the fixed establishment, said that he proposed to rely on the general principle that VAT should be charged at the place of consumption and therefore preference should be given to the criterion which enabled the supply of services to be located more accurately. There was no doubt that the more appropriate of the two for that purpose was the criterion of the “fixed establishment” which was clearly more precise.

The second ruling of importance for the purposes of the present case is Case C-260/95 Customs and Excise Commissioners v DFDS A/S [1997] ECR I-1005, [1997] STC 384. The facts which appear from the judgment of the European Court and the Opinion of Advocate General La Pergola are as follows. DFDS, a company incorporated in Denmark, engaged in shipping, travel and general transport, had a wholly-owned English subsidiary, DFDS Ltd. The subsidiary operated in Harwich as a commercial agent for its parent company, DFDS, selling package tours organized by the latter. An agency agreement concluded by the two companies designated the subsidiary as a general sales and port agent for DFDS in the United Kingdom and as central booking office for the United Kingdom and Ireland for all the passenger services of DFDS. The premises of the English subsidiary belonged to it and not to DFDS.

The English company had to deal with passengers’ complaints. It was not authorised to work for other passenger transport companies without DFDS’s prior consent. DFDS paid a gross commission of 19% on all fares sold by the English company. The English company had access, through a terminal in Harwich, to DFDS’s central computer in Copenhagen, which contained information on the availability of passenger space and hotel accommodation. Where the trip or accommodation requested was available, the reservation was accepted and the English company provided the passenger with the documentation, which was issued in the name and on behalf of DFDS. The English company carried on directly the business of marketing and advertising, but coordinated its activities with the commercial division of the DFDS, which reimbursed the advertising expenses incurred.

The Commissioners took the view that VAT was payable by DFDS on the package tours marketed on its behalf by its English subsidiary, because as a result of the agreement with its subsidiary, DFDS established its business in the United Kingdom or made the supplies in question from a fixed establishment in the United Kingdom. DFDS’s position was that the services were taxable at the place where it had established its business, namely Denmark, which had exempted such services from VAT.

The VAT Tribunal decided that DFDS had its principal place of business in Denmark and could not be subject in the United Kingdom to VAT on services sold in Harwich. The criterion of the place where the supplier had established his business took precedence over the criterion of the fixed establishment; and the human and technical resources of the English company must be regarded as constituting the fixed establishment of that company and not of the parent company DFDS.

The question referred by the High Court was:

The European Court characterised the question as seeking to determine under what conditions the services which a tour operator established in one Member State provides to travellers through the intermediary of a company operating as an agent in another Member State are liable to VAT in the latter State under Article 26. The European Court said that Article 26(2) used the same concepts of place where a supplier’s business was established and fixed establishment as those used in Article 9(1) to define the two main fiscal points of reference which may be applied to supplies of services in general. It was therefore appropriate to refer to the rules arising from that definition of place of supply: paras 16 and 17.

Applying Case 168/84 Berkholz v Finanzamt Hamburg-Mitte-Altstadt [1985] ECR 2251 the European Court said that, for the purposes of Article 9(1), the place where the supplier had established his business was a primary point of reference inasmuch as regard was to be had to another establishment from which the services were supplied only if the reference to the place where the supplier had established his business did not lead to a rational result for tax purposes or created; and services could not be deemed to be supplied at an establishment other than the place where the supplier had established his business unless that establishment was of a certain minimum size and both the human and technical resources necessary for the provision of the services were permanently present: paras 18-20.

The approach of the European Court was to consider, first, what the hierarchy would be if the tour operator had a fixed establishment from which it marketed tours and that establishment was in a State other than the State in which it had established its business, and then, second, whether it had such a fixed establishment.

On the first question, the Berkholz hierarchy, the Court said that to treat, for tax purposes, all the services provided by a tour operator, including those supplied in other Member States through undertakings operating on his behalf, as being supplied from the place where the tour operator had established his business, would have the clear advantage of having a single place of taxation for all the business of that operator covered by Article 26 of the Sixth Directive: para 21. But, the Court said (para 22),

Approving the Advocate General, the Court said that consideration of the actual economic situation was a fundamental criterion for the application of the common VAT system. The alternative approach for determining the place of taxation of the services of travel agents, based on the fixed establishment from which these services were supplied, was specifically intended to take account of the possible diversification of travel agents’ activities in different places within the Community. Systematic reliance on the place where the supplier had established his business could lead to distortions of competition, in that it might encourage undertakings trading in one Member State to establish their businesses, in order to avoid taxation, in another Member State which had availed itself of the possibility of maintaining the VAT exemption for the services in question: para 23.

In those circumstances, where services had been provided by a tour operator from a fixed establishment which that operator had in a Member State other than that in which he had established his business, such supply of services to the customer was taxable in the State where that fixed establishment was located: para 24.

In order to determine whether, in circumstances such as those of the case, the travel agent actually had such an establishment in the Member State in question, it was necessary first to ascertain whether or not the company operating in that State on behalf of the agent was independent from him: para 25.

The fact that the premises of the English subsidiary, which had its own legal personality, belonged to it and not to DFDS was not sufficient in itself to establish that the subsidiary was in fact independent from DFDS. The fact that the subsidiary was wholly owned by it, and the various contractual obligations imposed on the subsidiary by its parent, showed that the company established in the United Kingdom merely acted as an auxiliary organ of its parent: para 26.

Second, it was necessary to verify whether the establishment in question was of the requisite minimum size in terms of necessary human and technical resources. It was apparent from the facts, particularly as regards the number of employees of the company established in the United Kingdom and the actual terms under which it provided services to customers, that that company did display the features of a fixed establishment: paras 27-28.

Accordingly the answer was that Article 26(2) was to be interpreted as meaning that, where a tour operator established in one Member State provided services to travellers through the intermediary of a company operating as an agent in another Member State, VAT was payable on those services in the latter State if that company, which acted as a mere auxiliary organ of the tour operator, had the human and technical resources characteristic of a fixed establishment.

In the present case the Tribunal relied on the Opinion of Advocate General La Pergola in DFDS. In his opinion, DFDS Ltd could not be regarded as an independent agency. The ownership of all the capital of the subsidiary company was indicative of its dependency on its parent; and the English company did not market tours organised by a very large number of tour operators. Its contractual link with its parent meant that its agency business could be carried on only in relation to the parent, unless the latter had expressly consented otherwise. The subsidiary had no effective independence from DFDS in the conduct of its business. The same conclusion followed from the need for prior approval from DFDS regarding management of the subsidiary company, such as the appointment of senior staff, the conclusion of major contracts, the appointment of advertising and public relations agents, and the lack of any discretion in setting the prices of services. It did not seem in fact to bear any financial risk under the contracts it concluded with consumers in the course of its agency work on behalf of DFDS. The English company was therefore an auxiliary organ forming part of DFDS from the economic point of view.

It was a fixed establishment of DFDS. There was actual pursuit of an economic activity, it was pursued for an indefinite period and there was a fixed establishment. The English company had about 100 employees. The contract was concluded in the United Kingdom; it might be presumed that payment was made in local currency; any complaints from customers would be dealt with by the English company; and DFDS reimbursed any expenses incurred by the English company in legal proceedings to protect its interests.

It was for the competent authority in each State to determine to what extent one of the two criteria should be applied rather than the other. The European Court was called on to explain and oversee fulfilment of the requirements on which the choice of one criterion rather than the other should be based. Thus attention had to be focused on the consequences that would flow from the general criterion of the place where the supplier had established his business. If the result was rational, as intended by the directive, that is the rule to be preferred. There was no need for the other, which concerned the place of the fixed establishment.

The Advocate General aligned himself with the view advanced by the United Kingdom Government, which was that the problem was to be resolved by reference to the general principles laid down in Community tax legislation, including the requirement that VAT be levied at the place where the service was provided. Reference to the place where the supplier had established his business did not lead to a rational result. The first consequence of such an approach would in fact be failure to apply the legislative criterion that the place of taxation must fundamentally coincide with that at which the service was supplied to the consumer. The VAT system had to be applied in a manner as far as possible in harmony with the actual economic situation.

Application of the place where the supplier had established his business would exacerbate the problems, rather than simplifying them. If undertakings in the sector were allowed freely to determine, by choosing the location of their registered office, the place at which the services provided by them were to be taxed, there would be distortion of freedom of competition and other, more wide-ranging, repercussions for the business world.

To accept the criterion of the registered office in such a case resulted in distortion of competition between undertakings operating in the same market. In the case before the Court, tour operators in the United Kingdom would be discriminated against for establishing their headquarters in one place rather than another. Some of them would be subject to VAT on the services provided by them and others would not.

The Advocate General concluded that the scope of Berkholz must not be unjustifiably extended by construing it as meaning that the criterion of the establishment from which the services were provided is necessarily merely residual.

In Case C-190/95 ARO Lease BV v Inspecteur der Belastingdienst Grote Ondernemingen [1997] ECR I-4383, [1997] STC 1372 a Dutch car financing company (ARO) leased cars, mainly to Dutch customers, but also to some Belgian customers. All leasing agreements were drawn up in the Netherlands. ARO had no office in Belgium and customers were introduced to it through Belgian self-employed intermediaries. The Belgian tax authorities considered that VAT should be paid on the basis that the presence of a fleet of cars in Belgium meant that ARO had a fixed establishment there, and therefore Belgium was to be treated as the place of supply. The Netherlands tax authorities refused to reimburse the VAT, disputing that ARO had a fixed place of business in Belgium. The European Court noted (para 18) that the services supplied in the leasing of vehicles consisted principally in negotiating, drawing up, signing and administering the agreements and making the vehicles physically available. The Court ruled that when a leasing company did not possess either its own staff or a structure which had a sufficient degree of permanence to provide a framework in which agreements might be drawn up or management decisions taken and thus enable the services in question to be supplied on an independent basis, it could not be regarded as having a fixed establishment in that sense: para 19. Advocate General Fennelly expressed the view that the essence of the service comprised the conclusion of the contracts: para 31. See also Case C-429/97 EC Commission v France, [1993] ECR I-5881, [2001] STC 156 (composite supply to be taken as being from the Member State in which the supplier has established his business).

Neither of the other rulings to which we were referred involved any consideration of the factual places of supply of services Case C-452/03 RAL (Channel Islands) v Customs and Excise Commissioners [2005] ECR I-3947, [2005] STC 1025; Case C-231/94 Faaborg-Gelting Linien A/S v Finanzamt Flensburg [1996] ECR I-2395, [1996] STC 774.

The only decision to which we were referred which was directly on place of supply was the decision in Customs and Excise Commissioners v Chinese Channel (Hong Kong) Ltd [1998] STC 347 (Moses J). In that case the issue for the Tribunal was whether Chinese language satellite programmes provided to subscribers in England were supplied from a Hong Kong company or whether they were supplied from its United Kingdom affiliate as a fixed establishment. The Hong Kong company held the broadcasting licence, made arrangements for transmission and selected programmes. The English company marketed subscriptions, checked subscribers’ credit ratings, collected subscriptions and received and edited tapes of programmes to be broadcast. The Tribunal decided on the facts that the service was provided from Hong Kong and not from the United Kingdom. Moses J held that the decision was one of degree for the Tribunal, and one with which the court would not interfere.

For present purposes, under Article 9(2)(e) the place where services of consultants are supplied when performed for customers established outside the Community “shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied ..”

In the present case, for the purposes of Article 9 Switzerland is the place where ZIC has established its business. Nor can there be any doubt that ZIC(UK) is a fixed establishment of ZIC. Mr Prosser QC for ZIC virtually conceded that if the United Kingdom is the place to which the services were provided there is no basis for the place where ZIC has established its business (Switzerland) being regarded as the place where the service is deemed to be supplied for the purposes of Article 9(2)(e) under the Berkholz hierarchy.

The principal question for Park J was whether the Tribunal erred in law or came to a conclusion on the facts which can be disturbed in accordance with Edwards v Bairstow principles.

At the end of paragraph 13 the Tribunal treated the Advocate General as having the opinion in DFDS that travel services were provided where the contract for them was made rather than where the underlying supply was made. The Tribunal said (citing paragraphs 32 and 35 of the Advocate General’s opinion):

In paragraph 16 the Tribunal said that in DFDS the European Court was applying the economic situation not to the underlying supplier of travel services but to determining whether there was “a fixed establishment from which the service is supplied”. The Tribunal said: “In other words, the place from which the supply of the single travel service was made was determined by where the contract was made, the documentation issued and the consideration paid.”

At paragraph 17 the Tribunal said that it had to choose between the two possibilities on the basis of rationality, economic reality and distortion of competition. The Tribunal considered (at paragraphs 18 and 19), in the context of economic reality, the place of contracting, and at paragraph 23, weighing up these factors in terms of economic reality as understood in DFDS, they regarded the place of contracting as the most important.

These passages were based on a misunderstanding of the European Court’s ruling, and of the Advocate General’s opinion.

First, when the Court referred in paragraph 22 of the ruling to “the actual place where the tours were marketed … whatever the customer’s destination” it was drawing a distinction between the place where the services were provided (England) and the place where the business was established (Denmark). The English company was selling package tours, and the Court was plainly not deciding that the place where the contract was made was the place where the services were provided rather than the place of the customer’s destination.

So also when the Court approved in paragraph 23 of the ruling the Advocate General’s reference to “the actual economic situation” it was in the context of applying the hierarchy, and the reference to the English company being “the fixed establishment from which these services were supplied” was simply a re-iteration of what had gone before. It was not a holding that the actual economic situation meant that the place of contracting was more important than the place where the customer travelled in determining the place from which the services were supplied.

Second, the Tribunal misunderstood the context of these passages from the Advocate General’s opinion on which it relied:

There is nothing in these passages to suggest that the Advocate General was expressing the view that as a general principle the place where the contract was made was the place where the services were provided. He was discussing there whether the English company was a fixed establishment. It was in that context that he said that the problem was to be resolved by reference to the general principles laid down in Community tax legislation, including the requirement that VAT be levied at the place where the service was provided; and by reference to the legislative criterion that the place of taxation must fundamentally coincide with that at which the service is supplied to the consumer.

So also in another passage he referred to the contract being concluded in the United Kingdom, and referring to the criteria for a fixed establishment:

The reference to the contract being concluded in the United Kingdom is plainly in the context of determining whether the English company was a fixed establishment of the Danish company. Accordingly he considered it relevant that the contract was concluded at the English subsidiary rather than at head office. He was not considering the question whether the services were being supplied from that office as distinct from the place where the customers travelled.

Consequently DFDS had no bearing on the question before the Tribunal, and the Tribunal was wrong to treat it as the basis for its central findings in paragraphs 19 and 23 that the place of contracting was the most important factor.

That misunderstanding, and the consequent conclusion, was an error of law. There was no dispute as to the facts, and Park J was entitled to substitute his own evaluation, and, in common with the Chancellor, I consider that the conclusion is the only one to which he could have come.