HM Revenue & Customs v EB Central Services Ltd

EB Central Services Limited and its subsidiary, Excess Baggage Airports Limited (together called the Taxpayers in this judgment), claimed refunds of overpayments of VAT made by them to Her Majesty’s Revenue and Customs (HMRC). The Taxpayers accounted for VAT at the standard rate in respect of storage services provided by them to airline passengers. The services were left luggage facilities in the “landside areas” of Heathrow, Gatwick and Manchester airports i.e. the areas of the airport to which members of the general public have unrestricted access.

The Taxpayers contended that the services supplied by them to passengers should have been zero-rated for VAT, that being the domestic law designation for an exemption of supplies; with refund that they have overpaid VAT, which should be refunded; and that zero rating would have entitled them to deductions and refunds of VAT incurred on goods and services used by them for the purposes of their supplies.

An appeal against the refusal of refund was allowed in part by the VAT & Duties Tribunal (the Tribunal) which made a decision in principle on 16 June 2006. The effect of the Tribunal’s ruling was that 76% of the Taxpayers’ supplies were zero rated.

On 9 February 2007 the Chancellor dismissed HMRC’s appeal from the Tribunal. He allowed the Taxpayers’ cross appeal. The result was that the Taxpayers were entitled to be zero rated in respect of 95% of the supplies made by them.

On 20 June Arden LJ granted permission for a second appeal to this court on the ground that it raised an important point of legal principle on the interpretation of the Value Added Taxe Act 1994 (the 1994 Act). The point relates to the circumstances in which national courts are under a duty to construe exemptions from VAT in the 1994 Act, so far as it is possible to do so, to be compatible with the exemptions from VAT under EC law set out in the Sixth Directive 77/388/EEC of 17 May 1977 (the Directive).

HMRC invoked the principle of compatible construction of the 1994 Act, but the Chancellor held that the principle did not apply to the exemption provisions on which this case turns. He decided that the exemptions in the 1994 Act were not enacted to implement exemptions provisions in Article 15 of the Directive, but were referable to transitional derogation provisions in Article 28 of the Directive, under which Member States are entitled to maintain in force certain historic exemptions from VAT.

The appeal from the Chancellor’s ruling involves another aspect of the principle of compatible construction: what assistance may be legitimately obtained from preparatory legislative materials in order to determine whether or not amendments to the 1994 Act were intended to implement the exemptions in Article 15 of the Directive?

In this court, as is sometimes the case, the arguments were developed by each side with an emphasis that differed from the arguments in the Tribunal and before the Chancellor.

The Taxpayers provide a service at airports for airline passengers. They store passengers’ personal luggage for up to 90 days. The facilities are only offered in the landside areas of the Airport Terminal Buildings. Airline operators take charge of passengers’ flight luggage at the point where they check in for their flights. The airline operators are not involved in left luggage supplies. The Taxpayers neither transport passengers’ luggage nor do they carry out any acts preparatory to the aircraft transportation of the luggage. The Taxpayers do not store or handle commercial goods.

Personal luggage is deposited for an average length of 5 days before it is collected by passengers. There is no requirement that the deposited luggage either has been or will be carried on aircraft. 95% of the luggage left is, or has been, carried on aircraft by passengers. 76% of the luggage is carried by air to and from places outside the EU. The Tribunal found as a fact that none of the luggage left with the Taxpayers had a sufficient business connection to make it “cargo”, a term used in Article 15 of the Directive.

The luggage stored by the Taxpayers is left with them by passengers for a range of reasons: passengers may arrive early for flights; or they may be in transit; or their flights have been delayed, or their luggage may have exceeded the excess limits for flights; or it may be ski equipment left for collection under special arrangements.

The facts of the case are shorter and simpler than the state of the law. The legal arguments have shifted at different levels of decision. Some points taken by HMRC below are no longer pursued. Wherever possible I will avoid unnecessary complication.

In his judgment the Chancellor traced the legislative history of exemptions for the items of supplies with which the case is directly concerned. He began with the Finance Act 1972 which introduced VAT. From the start there were zero rated items. They covered the transport of passengers and freight. The zero rating provisions were re-enacted with amendments in the Finance Act 1983 and the VAT Act 1983.

Amendments extending zero-rating (i) to “storage” were made with effect from 1 May 1990 in relation to Item 6(b) and (ii) to storage supplies, beyond those made to persons in a business capacity and who belonged outside the UK, were made with effect from 1 January 1993.

The Directive had come into effect on 17 May 1977. It introduced a common system of VAT and a uniform basis of assessment. Articles 14 and 15 of the Directive covered required exemptions for specified supplies. Article 14 covers exemptions on importation. Article 15 covers exemptions of exports from the Community and like transactions and international transport. The relevant exemptions are in Article 15(9) and (13). They are mandatory and have direct effect in national courts and tribunals.

Article 28 of the Directive is relied on by the Taxpayers. It was prominent in the arguments in the Tribunal, on appeal to the High Court and in the written submissions to this court. The Article contains derogation provisions. Although they were described as “transitional” in 1977, they are still in force. Member States are permitted by the derogation provisions to maintain zero rated exemptions with refund of the tax paid for clearly defined social reasons and for the benefit of the final consumer. The transitional arrangements applied to exemptions in force on 1 January 1991. The Taxpayers relied heavily on Article 28 for their contention that the national court was not required to construe the provisions of national law for zero rating so as to be compatible with the provisions in Article 15 of the Directive requiring specified supplies to be exempt from VAT. The Chancellor adopted this approach and construed the relevant exemption provisions in the 1994 Act without applying the principle of compatible construction.

The Taxpayers built their case on the construction of the provisions of national law for zero rated supplies rather than on the directly effective provisions Article 15 of the Directive. At this hearing, however, and in the light of the arguments of HMRC against the application of Article 28, the Taxpayers’ also advanced arguments on the construction of the Directive, contending that the relevant supplies fall within Article 15 (9) and (13), as well as within the corresponding provisions of national law in Schedule 8 to the 1994 Act, Group 8, Items 6 (b) and 11(a).

The critical point is that, if the supplies fall within the exemptions in Article 15 (9) or (13) of the Directive, their direct effect means that there is no need for the Taxpayers to rely on national law. Directly effective provisions of EC law can be relied on by citizens, though not by the State itself, in domestic courts and tribunals. If, however, the supplies do not fall within Article 15, the Taxpayers maintain their contention that the supplies fall within the exemptions in national law. If they do, they can be relied on by the Taxpayers, even if it is impossible by the principle of compatible construction to read the national law compatibly with EC law. A breach of EC law by the UK in the implementation of the Directive into national law would not affect the right of the Taxpayer, as against the State, to rely on national law.

As for national law, the zero rated provisions are contained in section 30 of and Schedule 8 to the 1994 Act. The structure of the Schedule is subdivision into Groups, with lists of zero rated Items within each Group. The general presumption is that, when enacting implementing legislation like the 1994 Act, Parliament intended to fulfil the obligations of the UK under the Directive. This means that, unless for some special reason, such as the transitional derogation provisions of Article 28, the presumption does not apply, the 1994 Act must be construed, if it is possible to do so, so as to be compatible with the Directive. The zero rated Items in Group 8 of Schedule 8 must be read in the setting of the corresponding exemptions in the Articles in the Directive.

I turn to a comparison of the detailed exemption provisions of the Directive and of the Items in Group 8 Schedule 8 to the 1994 Act.

Article 15(9)/Item 6(b)

The relevant parts of Article 15(9) of the Directive provide for the zero rating of the supply of services

“…to meet the direct needs of aircraft …or of their cargoes.”

The corresponding provision in Schedule 8 to the 1994 Act, Group 8, Item 6(b), contains no express reference to “direct needs” or to “cargoes.” Under this Item the exemption is for services provided for “the storage” in a customs and excise airport of “goods carried in a ship or aircraft.”

On his construction of Item 6(b) the Chancellor differed from the Tribunal, which adopted the compatibility principle and held that the services supplied by the Taxpayers fell outside Item 6(b) and were not exempt, as the words of the Item covered goods “akin to cargo and require a commercial flavour lacking here.”(paragraph 30(a) of the decision). Construing the Item without reference to Article 15(9) the Chancellor held that the services fell within Item 6(b) and were exempt. (I should mention that some of the HMRC’s arguments before the Chancellor, such as the contention that arguments “goods carried in … aircraft” do not include the passengers’ luggage, have not been pursued on the appeal.)

Article 15(13)/ Item 11(a)

The relevant parts of Article 15(13) of the Directive provide for the zero rating of the supply of services consisting of the “storage of goods”

“…where these are directly connected with the export of goods or imports of goods…”

The corresponding provision in Schedule 8, Group 8, Item 11(a), contains no express reference to the storage of goods being “directly connected” with the export of goods or imports of goods. Under this Item the exemption is for the supply of services

“…consisting of …the storage of goods at…. a place at which they are to be exported to or have been imported from a place outside the Member states….”

The Tribunal and the Chancellor decided that the services supplied by the Taxpayers fell within Item 11(a) which, the Chancellor held, was to be construed without reference to Article 15(13) of the Directive. On the question of the compatibility principle he differed from the Tribunal but reached the same result by a different route. The Tribunal concluded that the word “goods” in Item 11(a) did not have the restricted business flavour of Item 6.

I should mention that there is now some common ground on this point, namely that the references in this Item to “the export of goods or imports of goods” can include personal luggage and do not impose any requirement that the goods in question should be for sale or re-sale.

An outline of the current competing contentions will indicate the shape of this appeal.

HMRC’s case is that it would be contrary to EC law for the storage services supplied by EBC to be zero rated. The Items in Group 8 of Schedule 8 must be construed consistently with the relevant parts of Article 15 of the Directive, in particular, with regard to the express references in Article 15 (9) and (13) of the Directive to “direct needs” of aircraft or their cargoes and storage “directly connected” with the import and export of goods in order to come within the exemptions in the Directive.

The essence of HMRC’s argument is that (1) the supplies of services are not required to be zero rated within Article 15(9) because they do not meet “the direct needs of cargoes” carried in aircraft and that Item 6(b) must be read so as to reflect this concept, thereby making the national law exemption in Item 6 (b) compliant with Article 15(9); and, similarly, (2) the supplies of services are not required to be zero rated within Article 15(13) because they are not “directly connected” with the export or imports of the goods i.e. the personal luggage. Item 11(a) has to be read to reflect this concept and to make the national law exemption in Item 11(a) compliant with Article 15(13).

As for the transitional derogation provisions in Article 28 of the Directive permitting the zero rating of supplies for the purposes of maintaining earlier provisions of national legislation, HMRC contend that the derogation provisions do not permit the zero rating of the services supplied in this case. Article 28, contrary to the Taxpayers’ contention, did not displace the duty of the court to construe the Items in Group 8 of Schedule 8 to be compatible with Article 15(9) and (13) of the Directive. Admissible preparatory legislative materials demonstrate clearly that the legislative purpose of amending the relevant Items in Schedule 8 was to implement the provisions in Article 15. No relevant or permissible use of the transitional derogation provisions was possible to maintain zero rating for the Items. If the implementation into national law was defective, then the principle of compliant construction was available to achieve compliance with the national obligations of member states under the Directive.

The Taxpayers contest HMRC’s construction of the Articles in the Directive and of the Items of Group 8. They invoke Article 28 of the Directive for the purpose of showing that Items 6 (b) and 11(a) fall within the scope of the permitted derogation. If that is right, as the Chancellor held it was, the Items do not have to be construed to be compliant with requirements of Article 15 (9) or (13).

I will deal first with the Article 28 point. HMRC submit that Article 28 turns out to be a “red herring” because it is irrelevant to the construction of the relevant storage services which are zero rated by the Items in Group 8 of Schedule 8. As this issue affects the approach to the construction of the Article in the Directive and the Items in Group 8, it needs to be resolved before dealing with the arguments on construction.

The Tribunal held that prima facie the provisions of the Items must be construed to accord with the Directive if possible. That was an application of the Marleasing principle. The Chancellor disagreed. He held that this was an erroneous approach to the construction of the Items. After referring to the authorities cited by counsel for the Taxpayers he concluded that they showed

“ 22. ….quite clearly that measures permitted by Article 28(2)(a) do not have to be interpreted by reference to and so as to accord so far as possible with harmonised measures from which they are a permitted derogation. Any other conclusion would be illogical.”

While not doubting the general principle derived by the Chancellor from the authorities, I am unable, with respect, to agree with his conclusion on its application to this case. In treating this case as covered by Article 28 the Chancellor rejected HMRC’s submission that it was the clear intention of Parliament when amending Items 6(b) and 11(a), to bring them into line with Articles 15(9) and (13). Group 8 Items did not have to be interpreted by reference to the Directive.

At this point it is relevant to consider the legislative history, as set out in the judgment of Dyson LJ, and the preparatory legislative materials. They are relied on directly in construing the provisions of Group 8 of Schedule 8, as can be done in cases which satisfy the requirements laid down in Pepper v. Hart [1993] AC 593. In this instance the materials have been introduced not to construe the legislation, but to establish the fact that the purpose of the relevant national amending legislation was to make national law compatible with the Directive.

On 2 May 1990 the Fourth Standing Committee on Statutory Instruments considered the Value Added Tax (Transport) Order 1990, which amended the zero-rating provisions of Group 10 of schedule 5 of the VAT Act 1983 covering a range of transport and related services supplied by UK businesses. The Directive was referred to in the Committee’s report. It was explained that the purpose of Article 6 of the 1990 Order was to bring item 6 more into line with the EC VAT Law by extending relief to ship and aircraft handling services outside the UK and to the storage of ship and aircraft cargo within UK ports and airports. The Committee’s report stated (on p4) that

“For handling services, the relevant sixth VAT directive provisions are articles 15.8 and 15.9 and for cargo storage they are 14.1(i) and 15.13.”

The report of the Committee’s proceedings reflects the contents of an Explanatory Memorandum submitted to the Standing Committee by HM Customs & Excise. It was stated in the relevant part that

“5.

Having regard to Articles 15.8, 15.9 and 17(3)(b) of the Sixth Directive item 6(a) has been varied so as also to zero-rate the supply of services for the handling of ships and aircraft where those services are provided outside the United Kingdom.

6.

Having regard to Articles 15.8, 15.9 and 15.13 of the Sixth Directive item 6(b) has been varied so as also to zero-rate the storage of goods.”

Reference is also made to the deletion of words in item 11 as otiose and continued

“ Services ancillary to the transport of passengers are treated for tax purposes in the same way as services of transport of passengers.”

These materials establish that the purpose of amending the items in 1990 by the addition of zero rating for storage was the better implementation of the Article 15 mandatory exemptions in the Directive. There was no reference at all in the Committee’s report or in the materials submitted to it to the derogation provisions in Article 28 of the Directive.

As counsel for HMRC pointed out, the exemptions introduced in the national legislation would not come within Article 28, as they involved extending the exemptions. They were not simply “maintaining” in national legislation historic zero-rated provisions. If proper account is taken of these materials and of the terms of Article 28 itself, this is not a derogation case free from the principle of compatible construction. On the contrary, this was a case of implementing legislation, which attracts the application of the principle.

On that note I turn to the construction issues.

The first question is whether Articles 15 (9) and/or (13) of the Sixth Directive cover the services supplied by the Taxpayers. If they do, the Taxpayers succeed, even if it is only on Article 15(9).

If they do not, the Taxpayers fail on construction, unless it is shown that Items 6 and/or 11 in Schedule 8 cover the services supplied by them and cannot be construed to be consistent with Article 15.

In my judgment, the services supplied by the Taxpayers do not fall within Article 15(9): they do not meet the direct needs of aircraft or of their cargoes. It is common ground that the passengers’ luggage stored by the Taxpayers is not aircraft cargo. The storage services supplied by EBC do not meet “the direct needs” of aircraft. “Direct needs” of aircraft refer to services necessary to the operation of the aircraft: see Berkholz v. Finanzamt Hamburg-Mitte-Altstadt [1985] ECR 2251. It is not necessary for the operation of the aircraft or their cargo that the Taxpayers supply a left luggage service for the passengers. The direct needs met by the Taxpayers’ services are not those of aircraft or their cargoes at all, but those of the passengers who, for one reason or another, have not checked in and consigned to the operators of the aircraft their luggage for transportation on their aircraft flights. Until that has been done the services supplied by the Taxpayers are for the convenience of the passengers, not to meet the direct needs of aircraft or their cargoes.

For similar reasons the services supplied do not fall within Article 15 (13): they are not “directly connected” with the import or export of the passengers’ luggage. That direct connection does not begin until the passenger have checked in their luggage for their flight and consigned it to the aircraft operator. Once they have done that there is a direct connection with the export of the luggage by transportation and ancillary operations.

Taken on its own I can see how Item 6 (b) could be read as covering the services supplied by the Taxpayers for the reasons given by the Chancellor in paragraphs 33 and 34 of his judgment. HMRC now accept that “goods” include personal luggage. Given the finding that the facilities for storage supplied by the Taxpayers are used in respect of goods, 95 % of which have been or are to be carried on an aircraft, personal luggage could fall within Item 6 as “goods carried in aircraft.” The Chancellor held that “carried” was used adjectivally “without any necessary reference to the time of carriage.”

As already explained, however, the Chancellor rejected the contention that Item 6(b) had to be construed so as to accord, as far as possible, with Article 15(9). The basis of his rejection was that this compatibility principle did not apply to measures permitted as a derogation by Article 28(2)(a) of the Directive.

In my judgment, however, the provisions in Article 15 (9) govern the construction of the implementing provision in Item 6(b). If possible, Item 6(b) must be construed compatibly with the Directive requirement of the “direct needs of aircraft or of their cargoes.” It can be construed compatibly in accordance with the principles in Litster [1990] 1 AC 456 and Marleasing [1990] ECR 1 4135 by reading into the Item the core concept in Article 15(9) of storage to meet “ the direct needs” of aircraft or of their cargoes. In my judgment, HMRC’s appeal on this point succeeds. There is nothing in Item 6(b) that is incompatible with that concept of “direct needs”. Although the concept has not found verbal expression in the Item, it is possible to read into it that link or connection between the storage and the aircraft.

In a similar way the concept of “direct connection” in Article 15(13) governs the construction of Item 11(a). As with Item 6 (b), it is not a matter of inserting in the implementing provision the very wording of Article 15 to achieve a compatible construction of the Items in the Schedule and the Article 15 provisions. The point is that there is nothing in the Item which makes it impossible to read in the requirement of a direct connection between the storage and the place at which the goods are to be exported or imported.

The Taxpayers cannot avoid this construction by bringing its case within the derogation provisions of Article 28, which only permitted member states to maintain certain “exemptions with refunds of tax at the preceding stage.” The insertion of an exemption for “storage” could not have been made under Article 28, as it only permitted the maintenance of national exemption provisions, not their expansion.

I would allow the appeal.

In brief, HMRC succeed on the construction of Article 15(9) and on Item 6 (b) taken with it and on Article 15(13) and on Item 11(a) taken with it. The Taxpayers have failed to bring the services supplied by them within the derogation provisions of Article 28 (2) entitling the UK to maintain zero rated services. To include them would not be permitted by Article 28 as it would expand, rather than maintain, the historic exemptions. Since preparing this judgment I have had the benefit of reading Dyson LJ’s judgment in draft. I agree with it, in particular with his more detailed treatment of the submissions made by Mr Milne QC on behalf of the Taxpayers.

I agree that this appeal should be allowed. I wish to add some words of my own, not least because we are differing from the views of the Chancellor. The issue arising in this case is whether the charges for the Taxpayers’ provision of storage facilities for the personal luggage of passengers at Heathrow, Gatwick and Manchester Airports should be zero-rated on the grounds that they fall within items 6(b) and 11(a) of Group 8 in Schedule 8 to the VAT Act 1994 (“the 1994 Act”).

These items to be zero-rated are, so far as material, in the following terms:

“6.

Any services provided for-

(a)

the handling of ships or aircraft in a port, customs and excise airport or outside the United Kingdom; or

(b)

the handling or storage-

(i)

in a port,

(ii)

on land adjacent to a port,

(iii)

in a customs and excise airport, or

(iv)

in a transit shed,

of goods carried in a ship or aircraft.

11.

The supply-

(a)

of services consisting of

(i)

the handling or storage of goods at, or their transport to or from, a place at which they are to be exported to or have been imported from a place outside the member States; or

(ii)

the handling or storage of such goods in connection with such transport;”

The Taxpayers contend that their services fall (i) within item 6(b) because they are “services..for…the storage…in a customs and excise airport….of goods carried in a[n]….aircraft” and (ii) within item 11(a) because they are “services consisting of…the storage of goods, at…a place at which they are to be exported to or have been imported from a place outside the member states” or “the…storage of such goods in connection with such transport”.

The relevant corresponding current provisions of the Sixth Directive are article 15(9) and (13) which, so far as material, are in these terms:

“(9). The supply of services other than those referred to in paragraph 6, to meet the direct needs of aircraft referred to in that paragraph or of their cargoes;

….

(13). The supply of services, including transport and ancillary operations, but excluding the supply of services exempted in accordance with Article 13, where these are directly connected with the export of goods or imports of goods covered by the provisions of Article 7(3) or Article 16(1), Title A.”

Also relevant is article 28(2)(a) which provides:

“Notwithstanding Article 12(3), the following provisions shall apply during the transitional period referred to in Article 281.

(a)

Exemptions with refund of the tax paid at the preceding stage and reduced rates lower than the minimum rate laid down in Article 12(3) in respect of the reduced rates, which were in force on 1 January 1991 and which are in accordance with Community law, and satisfy the conditions stated in the last indent of Article 17 of the second Council Directive of 11 April 1967, may be maintained.

Member States shall adopt the measures necessary to ensure the determination of own resources relating to these operations.”

The first issue is whether items 6(b) and 11(a) should, so far as possible, be construed consistently with article 15(9) and (13). If no, then the appeal must be dismissed. If yes, the second issue is whether the provision of luggage storage facilities falls within the exemption from VAT in article 15(9) and/or (13). If it does, the appeal must be dismissed. If it does not, the third issue is whether items 6(b) and/or 11(a) can be construed consistently with article 15(9) and/or (13).

The Chancellor held that items 6(b) and 11(a) were derogations which, so far as material, were not in excess of what was permitted as at 1 January 1991 and that, therefore, there was no reason to require the two items to be consistent with the articles.

Items 6(b) and 11(a) require separate consideration. The terms of item 6(b) are the same as those of the corresponding domestic legislation which was in force on 1 January 1991. The previous version of item 6 first appeared in the Finance Act 1972, Schedule 4, Group 10 in these terms: “any services provided for…the handling….in a….customs airport….of goods carried in….[an] aircraft”. The provision of storage services was not included. This formulation was reproduced in the Finance Act 1983, Schedule 5, Group 10. The current version (which added the service of storage) appeared as item 6 in Schedule 5 Group 10 of the VAT (Transport Order) 1990 SI 1990 No 752 amendment to Finance Act 1983 (“the 1990 Order”) with effect from 1 May 1990. It was reproduced in the 1994 Act.

The reason why the legislative history is of significance is that the current version of article 28(2) of the Sixth Directive (which was adopted on 19 October 1992) was preceded by the version of article 28(2) which was adopted on 17 May 1977. This earlier version provided: “Reduced rates and exemptions with refund of tax paid at the preceding stage which are in force on 31 December 1975….may be maintained until a date which shall be fixed by the Council….”

Thus, when Parliament amended item 6 with effect from 1 May 1990 to add storage to the zero-rated services, it could not properly have been intending to extend the scope of the derogation permitted to be maintained by article 28(2), because at that time the exemptions permitted by article 28(2) were limited to those in force on 31 December 1975. Such an extension would have placed the United Kingdom in breach of its treaty obligations. There is no warrant for supposing that this is what Parliament intended to do. If Parliament was not intending to extend the derogation, it must have been intending to give effect to article 15(9) and/or (13) of the Sixth Directive. I should point out that unfortunately the earlier version of article 28(2) was not brought to the attention of the Chancellor.

It follows in my view that item 6 in its current form cannot be said to be a purely national measure derogating from the harmonised definitions of standard rated and exempt supplies. The introduction of the reference to storage charges must have been effected in order to make item 6 consistent with the corresponding provision(s) in the Sixth Directive.

This conclusion is reinforced by the material referred to by Mummery LJ at paras 37 to 39 above. The Explanatory Memorandum was submitted by HM Customs and Excise to the Select Committee on Statutory Instruments in relation to the 1990 Order and before it came into force on 1 May 1990. When moving the consideration of the Order, the Economic Secretary to the Treasury said:

“We are also making some minor adjustments to a number of reliefs within the group so that they more accurately reflect the provisions of the EC sixth directive on VAT……..

Article 6 brings item 6 more into line with the EC VAT law by extending relief to ship and aircraft handling services outside the United Kingdom and to the storage of ship and aircraft cargo within United Kingdom ports and airports. For handling services the relevant Sixth Directive provisions are articles 15.8 and 15.9 and for cargo storage they are 14.1(i) and 15.13.”

The Chancellor considered that the statements in the Explanatory Memorandum “were too general to be of any help on the point of construction” (para 27). He also said that there was no ambiguity to which the statement in Hansard was relevant and that the statement was in any event insufficiently clear to be of assistance: the phrase “more into line” did not connote complete consistency and articles 14(1)(i) and 15(13) had nothing to do with the storage of cargo or anything else. It seems to me that, having regard to the fact that the reason why HMRC placed the material before the Chancellor was to support the argument that “goods” in item 6 was “cargo” within the meaning of article 15(9), it is not surprising that he made these comments.

But, before us, HMRC relied on this material in order to show that the purpose of the 1990 Order in bringing storage within the purview of item 6 was to implement article 15(9) and (13). In my view, the statements in the Explanatory Memorandum and Hansard show that this is what was intended by the 1990 Order. The Explanatory Memorandum clearly explains that it was decided to zero-rate the storage of goods “having regard to articles 15(8),(9) and (13)”. In my judgment, these words show that item 6(b) was being amended in order to bring it into line with the relevant provisions of article 15. I accept that the weight that can be placed on the Hansard statement may be more questionable. But, taking the points made by the Chancellor, I would say that the words “more accurately reflect” and “more into line” used by the Economic Secretary do not suggest that the intention was to bring United Kingdom national law more into line with the Sixth Directive, but still fall short of it. There is no reason to impute such an intention to Parliament. Nor do I agree with the Chancellor that article 15(13) had nothing to do with storage of cargo or anything else. It seems to me that “the supply of services, including transport and ancillary operations….where these are directly connected with the export of goods or import of goods…” (emphasis added) are wide enough to include the storage of cargo to be exported or imported, even though storage is not explicitly mentioned.

I conclude, therefore, that item 6(b) should be construed consistently with article 15(9) and (13).

What about item 11(a)? Unlike item 6(b), item 11(a) has undergone change since 1 January 1991. The version current as at that date (item 12(a) of Schedule 5, Group 10 of Value Added Tax Act 1983) gave exemption to “the supply to a person in his business capacity (and not in his private capacity) who in that capacity belongs in a country other than the United Kingdom (a) of services consisting of the handling or storage of goods at or their transport from the place at which they are to be exported or have been imported….”. Item 11(a) in its current form first appeared as item 12(a) of Schedule 5, Group 10 of the VAT (International Services and Transport) Order SI 1992 No 3223 amendment to Value Added Tax Act 1983. The scope of the exemption was enlarged by removing the restriction of supplies to a person in his business capacity who in that capacity belongs in a country other than the United Kingdom. To this extent, in so far as item 11(a) is a derogation, it is not permissible pursuant to article 28(2).

The Chancellor recognised at para 23 of his judgment that “if items 6 and 11(a) exceed the derogation in force on 1 January 1991 they are not deprived of legal effect, but, as an exemption, should be construed strictly and, so far as possible, consistently with Articles 14 and 15”. I respectfully agree. In my judgment, article 28(2) is not material to this appeal in so far as it relates to item 11(a). So far as possible, therefore, the item must be interpreted consistently with article 15 and in particular with article 15(13).

In my judgment, for the reasons given by Mummery LJ at paras 43 to 46 above, the storage of luggage in the “landside areas” of airports does not meet the “direct needs” of the aircraft or their cargo (article 15(9)) nor is it “directly connected” with the export or import of goods (article 15(13)). The concept of supplying services to meet the “direct needs” of sea-going vessels within the meaning of article 15(8) was considered by the ECJ in Berkholz v Finanzamt Hambur-Mitte-Alstadt [1985] ECR 2251. At para 21, the court said:

“It appears from all of the provisions cited that the only services exempted under Article 15(8) are those which are directly connected with the needs of sea-going vessels or their cargoes, that is to say services necessary for the operation of such vessels. The installation of gaming machines whose object is to entertain passengers and which themselves have no intrinsic connection with navigational requirements cannot be classed as such.”

This is also the correct approach to “meet the direct needs of” aircraft or their cargo within the meaning of article 15(9). That was the view expressed by the Chancellor in SITA v Customs and Excise Commissioners [2004] STC 950 at para 17, and I agree with it.

I accept the submissions of Mr Mantle that the storage of luggage in the “landside areas” does not meet the direct needs of cargoes of aircraft. There is no obligation imposed on the Taxpayers by the airports to accept only luggage that is going to be, or has been, carried on an aircraft. There is no contractual requirement on customers that they should only deposit luggage that is going to be, or has been, carried on an aircraft. There is no inevitability, or practical necessity, that luggage stored in the Taxpayers’ stores has just been or will shortly be carried on an aircraft. The customer terms permit an item of luggage to be left in store for 90 days.

There is not the required direct connection between the storage and the luggage having been previously carried on an aircraft or being carried on aircraft subsequently. It is true that in most cases, luggage stored in the “landside areas” has been or will become cargo on an aircraft: it was common ground before the VAT Tribunal that 95% of luggage left at the Taxpayers’ facilities is carried on aircraft by passengers. It is not, however, necessary for luggage so stored to have been or to become cargo on an aircraft. For example, it may be excess baggage left behind whilst the owner, unwilling to pay the extra cost of carriage, goes on a flight. Or, whilst the luggage is in store, the owner may decide not to fly, for example, because he or a member of his family becomes ill or dies. Or, the flight may be cancelled, and he may decide to postpone his planned flight and retrieve his luggage and go home. Other examples could be given.

In my view, the direct connection between the storage and the luggage being carried on a subsequent flight will be established only when the luggage is consigned to the possession of the carrier at the check-in desk. Once this happens, the luggage ceases to be in the custody and control of the owner and it becomes cargo. The owner has decided to place it in the hands of the carrier with a view to being carried as cargo on an aircraft. If it becomes necessary for the carrier to store the luggage thereafter, that storage is a service to meet the direct needs of the cargo. Only then is there the necessary direct connection between storage and the luggage being subsequently carried on the aircraft. The luggage will be carried and the storage is a necessary step on the way.

Similar reasoning leads to the same conclusion in relation to article 15(13). The requirement of a direct connection between the storage of the luggage and its carriage by air is explicitly articulated in article 15(13).

I now turn to the question of how item 6(b) and 11(a) should be construed. Read literally and without regard to article 15, item 6(b) would appear to be wide enough to exempt the service of providing luggage storage facilities in the “landside areas” of the airports. They are services for “storage..in a…customs and excise airport…of goods carried in…[an] aircraft”. Similarly with regard to item 11(a): they are services “for the storage of goods at ...a place at which they are to be exported to or have been imported from a place outside the member states”.

Mr Milne QC submits that, apart from some vague similarity, it is clear that neither item could ever be considered to be equivalent to the articles, since they are in some respects wider, and in other respects narrower than the exempting provisions in article 15. In these circumstances, he argues, it is impossible to reconcile the two and meaningless to say that they should be interpreted in accordance with the Sixth Directive in some respects and not in others.

Mr Milne draws attention to the following differences. As to item 6 and article 15(9), (i) article 15(9) is residual in nature and allows exemption of all services not already exempted by article 15(6), whereas item 6 zero-rates only specific services (ie handling and storage); (ii) article 15(9) provides for exemption of services wherever performed, whereas item 6 zero-rates services only at specific locations (ie airports, ports etc); (iii) article 15(9) only allows exemption for services relating to a specific class of aircrafts (those operated by “airlines chiefly operating on international routes”, whereas item 6 zero-rates services relating to any aircraft; and (iv) article 15(9) refers to services fulfilling the “direct needs of aircraft cargo”, whereas item 6 refers to “goods carried in an aircraft”.

As to item 11 and article 15(13), Mr Milne submits that (i) article 15(13) is general in application and exempts all services fulfilling certain conditions, whereas item 11 only deals with specified services (handling, storage and transport); (ii) article 15(13) only allows exemption in relation to very limited and specified kinds of import and export (goods covered by article 7(3) and 16(1)), whereas item 11 zero-rates the services in relation to all imports and exports; (iii) article 15(13) allows exemption of services wherever performed, whereas item 11 limits zero-rating to services provided at a specific location (the place of import or export); and (iv) article 15(13) imposes a requirement that there be a “direct connection” with the import or export, whereas item 11 contains no such restriction.

At first sight, these are powerful points. But it is necessary to bear in mind the strength of the interpretative obligation on a national court to seek to construe its domestic legislation in a way which is consistent with a relevant EU Directive. Mummery LJ has referred to Marleasing and Litster. It is well established that, where necessary, the court will supply by implication words in order to satisfy the United Kingdom’s treaty obligations, provided that to do so is consistent with the general scheme of the domestic legislation. Litster was concerned with the construction of a regulation which provided that a transfer of an undertaking would not operate to terminate the contract of employment of a person employed by the transferor and that any reference to a person employed in an undertaking was a reference to a person so employed “immediately before the transfer”. The House of Lords held that the regulation should be read as if there were inserted after the words “immediately before the transfer” the words “or would have been so employed if he had not been unfairly dismissed in the circumstances described in regulation 8(1)”. Such an implication was consistent with the general scheme of the Regulations and was necessary if they were effectively to fulfil the purpose for which they were made of giving effect to the provisions of the Directive: see per Lord Oliver of Aylmerton at [1990] 1 AC 546, 577B-D.

Arden LJ put the point in a similar way in HMRC v IDT Card Services Ireland Ltd [2006] STC 1252 at [90]:

“In determining whether the solution is one of interpretation or impermissible law-making, the relevant test remains whether the interpretation that would be required to make the statute in question….EU law-compliant, would involve a departure from a fundamental feature of the legislation. As I see it, the latter cannot be the case where the effect of the interpretation would be to bring the statute into conformity with the objectives of the Sixth Directive in the absence of clear statutory language to the effect that Parliament intended that there should not be such conformity.”

The first two differences noted by Mr Milne between item 6 and article 15(9) do not seem to me to be of significance in the present context. If there are services (other than those referred to in article 15(6)) to meet the direct needs of aircraft or their cargoes over and above handling and storage, then those additional services can and should be read into item 6. To do so would not involve a fundamental departure from item 6 or the domestic legislation as a whole. It seems to me that the disparity in language is the result of the adoption of different drafting techniques rather than an intended difference of substance. The same point applies to the difference provisions made as to the place where the exempted services are provided. If there are locations over and above those specified in item 6, then these additional locations can and should be read into the item. That would not involve a fundamental departure from item 6 or the domestic legislation as a whole.

The third difference is of greater significance. The supply of services referred to in article 15(9) is to aircraft used by airlines chiefly operating for reward on international routes. This includes aircraft which operate on domestic routes used by such airlines: see Case C-251/05, Cimber Air A/A v Skatteministeriet [2005] STC 547 para 30. But it does not include the supply of services to aircraft used on domestic routes by airlines which do not chiefly operate for reward on international routes. In my view, however, there can and should be read into item 6(b) the words “used by airlines operating for reward chiefly on international routes” after the word “aircraft”. That would not involve a fundamental departure from item 6 and would be consistent with its general scheme.

But even if that is wrong, it is an insufficient reason for not interpreting “the storage…of goods carried in a[n]…aircraft” as being a service to meet the direct needs of aircraft cargo in the sense explained by the ERCJ in Berkholz (para [71] above). This interpretation is consistent with and implements article 15(9). It does not involve a fundamental departure from item 6(b) or the domestic legislation as a whole. Mr Milne submits that it is “meaningless” to say that item 6(b) should be interpreted in accordance with article 15(9) in some respects and not in others. I disagree. The interpretative obligation is to construe item 6(b) consistently with article 15(9) so far as possible. Even if the United Kingdom has impermissibly extended the exemption to the provision of storage and handling of goods carried in aircraft used by airlines not operating for reward chiefly on international routes, that is not a reason for not seeking to limit the scope of the breach of its treaty obligations and, so far as possible, construing the item consistently with the article.

I would, therefore, hold that item 6(b) can and should be construed consistently with article 15(9).

I would apply similar reasoning to the differences identified by Mr Milne between item 11 and article 15(13). As regards the first difference, if there are services (other than those referred to in item 11) which come within the scope of article 15(13), these additional services can and should be read into item 11. That would not involve a fundamental departure from item 11 of the domestic legislation as a whole. As for the second difference identified by Mr Milne, in my view item 11 can be read down to restrict its scope to services directly connected with the export of goods and the import of goods covered by the provisions of article 7(3) and 16(1) Title A. There seems to be a close match between the respective provisions in relation to export. I would hold that item 11(a) should be read down so as to conform with article 15(13). I do not consider Mr Milne’s third difference to be significant. If there are locations over and above those specified in item 11, these can and should be read into the item. That leaves Mr Milne’s fourth difference. This is in substance the same as the fourth difference identified by him in relation to item 6(a) and article 15(9). Mutatis mutandis, my answer to the point is the same as I have given at para [85] above.

I would, therefore, hold that item 11(a) can be construed consistently with article 15(13).

For these reasons, in agreement with Mummery LJ, I would allow the appeal in relation to both item 6(b) and 11(a).

I agree and add only a few lines on the reference in Article 15(9) of the Sixth Directive to the supply of services “to meet the direct needs of aircraft … or of their cargoes”. Berkholz supra illustrates that the test of a “direct need” is a strict one. On that basis it cannot possibly be argued (nor was it) that it is a direct need (or, indeed, any need) of any aircraft that a service should be made available by which its passengers’ luggage should be capable of being stored “landside” at any airport. If, on the same strict basis, one then turns to considering whether it is a direct need of the cargo of any aircraft that some such service should be supplied, a distinction has to be drawn between luggage and cargo. In my view, passengers’ luggage does not have the characteristics of cargo until (before flight) it is consigned; until, at the earliest, it is “checked in”. In the rarer case of storage after flight, luggage ceases to have the characteristics of cargo not later than when it is “checked out”. On that basis the taxpayer, whilst indubitably storing luggage, does not store cargo and hence the service which the taxpayer offers, whilst no doubt a useful service for luggage, does not serve any need of cargo.