Federation of Technological Industries & Ors, R (on the application of) v Customs and Excise & Anor

On this application which is dated the 8^th October 2003 53 traders in mobile telephones and computer processing units and their trade body the Federation of Technological Industries (“the Claimants”) seek: (1) permission to claim declarations that paragraphs 4(1A) and (2) of Schedule 11 and section 77A of the Value Added Tax Act 1994 (“the 1994 Act”) are contrary to Community law and are incompatible with the European Convention on Human Rights (“the Convention”); and (2) a reference of that question to the European Court. The Defendants are the Commissioners of Customs and Excise (“the Commissioners”) and the Attorney General, to whom I shall refer together as “the Defendants”. The statutory provisions in question were inserted into the 1994 Act respectively by sections 17 (“Section 17”) and 18 (“Section 18”) of the Finance Act 2003 which was passed on the 14^th July 2003. (I shall refer to Sections 17 and 18 together as “the Sections”). The Sections were passed to counter widespread abuse of the VAT system. The thrust of the Sections is that a taxable person: (1) may be required to provide security for the VAT due from his supplier of goods or services and the person to whom he makes supplies; and (2) may be made jointly and severally liable with them for that VAT in the case of supplies of telephones and computers.

The application was made shortly before the expiration of the three months from the date of the passage of the legislation. The Defendants raised the preliminary objection that the application should be refused on the ground that it was not made promptly. The application, it would appear, could have been made more promptly, but any lack of promptness can have occasioned no prejudice. The Sections are on-going legislative provisions. The issue of the legality of the Sections and their consistency with Community law in the public interest must plainly be determined as a matter of urgency and these proceedings are the appropriate vehicle for this purpose. To refuse this application on that ground would be to promote rather than remove uncertainty and would scarcely accord with the duty of the court (if necessary by its own motion) to consider the compatibility of the Sections with Community law and promote legal certainty. I accordingly decline to accede to this objection on behalf of the Defendants.

Paragraph 4 of Schedule 11 as amended by Section 17 provides that a taxable person may be required as a condition of making or receiving a supply to provide security (as well as for the VAT due from himself which is plainly authorised) for the VAT due from his supplier and the person whom he supplies. It reads (so far as material) as follows:

“(4)

[…]

(2)

If they think it necessary for the protection of the revenue, the Commissioners may require a taxable person, as a condition of his supplying or being supplied with goods or services under a taxable supply, to give security, or further security, for the payment of any VAT that is or may become due from—

(a)

the taxable person, or

(b)

any person by or to whom relevant goods or services are supplied,

[…]

(4)

Security under sub-paragraph (2) above shall be of such amount, and shall be given in such manner, as the Commissioners may determine.

[…]

(5)

In section 72(11) (penalty for supplying goods in contravention of paragraph 4(2) of Schedule 11) after ‘supplies’ insert ‘or is supplied with’.

[…]

(7)

In section 84 (further provisions relating to appeals) after subsection (4D insert—

‘(4E) Where an appeal is brought against a requirement imposed under paragraph 4(2)(b) of Schedule 11 that a person give security, the tribunal shall allow the appeal unless the Commissioners satisfy the tribunal that—

(a)

there has been an evasion of, or an attempt to evade, VAT in relation to goods or services supplied to or by that person, or

(b)

it is likely, or without the requirement for security it is likely, that VAT in relation to such goods or services will be evaded.’

[…]”

Section 77A of the 1994 Act inserted by Section 18 provides that a taxable person may be made jointly or severally liable for the VAT due from the person whom he receives or to whom he makes supplies of telephones and computers, the principal goods in respect of which the current frauds are perpetrated. It reads (so far as material) as follows:

“(1)

This section applies to goods of any of the following descriptions—

(a)

telephones and any other equipment, including parts and accessories, made or adapted for use in connection with telephones or telecommunication;

(b)

computers and any other equipment, including parts, accessories and software, made or adapted for use in connection with computers or computer systems.

(2)

Where—

(a)

a taxable supply of goods [or services; see below ss 10(a)] to which this section applies has been made to a taxable person, and

(b)

at the time of the supply the person knew or had reasonable grounds to suspect that some or all of the VAT payable in respect of that supply, or on any previous or subsequent supply of those goods, would go unpaid,

the Commissioners may serve on him a notice specifying the amount of the VAT so payable that is unpaid, and stating the effect of the notice.

(3)

The effect of a notice under this section is that—

(a)

the person served with the notice, and

(b)

the person liable, apart from this section, for the amount specified in the notice, are jointly and severally liable to the Commissioners for that amount.

[…]

(6)

For the purposes of subsection (2) above, a person shall be presumed to have reasonable grounds for suspecting matters to be as mentioned in paragraph (b) of that subsection if the price payable by him for the goods in question—

(a)

was less than the lowest price that might reasonably be expected to be payable for them on the open market, or

(b)

was less than the price payable on any previous supply of those goods.

(7)

The presumption provided for by subsection (6) above is rebuttable on proof that the low price payable for the goods was due to circumstances unconnected with failure to pay VAT.

(8)

Subsection (6) above is without prejudice to any other way of establishing reasonable grounds for suspicion.

[…]

(10)

For the purposes of this section—

(a)

‘goods’ includes services;

[…]”

The Commissioners have issued Guidance Notices in respect of the Sections, namely Notice 700/52 in respect of Section 17 and the requirement of security and Notice 726 in respect of Section 18 and joint and several liability. Notice 700/52 requires taxable persons to take reasonable steps to avoid dealing with high risk businesses and provides that a warning letter shall be sent before a notice is served requiring the provision of security. Notice 276 requires the taxable person to exercise reasonable and ordinary prudence in respect of the supply chain of which he is part and in particular to ask sensible and prudent questions of his customers and suppliers. Both Notices give the assurance that the Commissioners will not trigger the provisions if the taxable person does all that is reasonably required of him to maintain the integrity of the chain of supply.

The Claimants maintain that the duties expected of them are expensive and indeed impracticable to perform and that the threat of sanctions has a most serious effect on the conduct and financing of their businesses. Indeed the adverse effect on trade is said to be such that many have all but ceased trading. This is challenged by the Defendants. The Defendants maintain that the duties and sanctions are of critical importance, if not vital, to safeguard the VAT system and counter the current fraud which costs the economy in excess of £1.5 billion each year, and that the obligations require only the taking of reasonable and sensible precautions and the making of reasonable inquiries.

The challenge to the Sections is made on three grounds: (1) lack of vires or power under Community law; (2) contravention of principles of Community law; (3) incompatibility with the European Convention on Human Rights (“the Convention”) incorporated within Community law.

The orthodox approach is to give permission to apply for judicial review if the claimant shows an arguable case. But the court in the exercise of its discretion whether to give permission may impose a higher hurdle if the circumstances require this. Factors of substantial importance in this context may include the nature of the issue, the urgency of resolution of the dispute and how detailed and complete is the argument before the court on the application for permission.

Turning to the last of these considerations the fuller the argument the easier it is for the court to form a judgment of the prospects of success. The hurdle may range from requiring likely success at the substantive hearing to merely establishing an arguable case. The former may be the appropriate standard where there has been on the application for permission the detailed presentation and development of argument to be expected at the substantive hearing. When there has been something less than the detailed presentation and development to be expected at the substantive hearing (as has been the case before me) it may be appropriate in the ordinary case to set a standard or requirement mid-way between these two limits: see The Queen v. Northampton BC (Forbes J) 10^th July 2003. This may be formulated as requiring a substantial prospect of success.

Where a substantial issue of Community law arises, assuming that the case is a proper one for a reference to the European Court, special circumstances may arise, for the likely outcome is a matter on which English judges are likely to be less qualified to predict the outcome and there may be an overriding requirement for a Community-wide authoritative pronouncement by the European Court. This has to be reflected in the standard set in such a case, and indeed if the issue is such that a reference is appropriate, the hurdle in the way of granting permission must in all likelihood be surmounted. The discretion however remains whether to grant permission and order the reference.

The conventional test on an application for a reference to the European Court on a question of construction of Community instruments is whether the national court has any real doubt as to the outcome of the reference: see R v. International Stock Exchange ex p. Else [1993] QB 534 at 535. But a measure of self restraint is required if the European Court is not to be overwhelmed, and in these circumstances permission should not be given, most particularly in the technical fields of customs and VAT, in cases where national courts are able to extrapolate the principles stated in European Court case-law and to decide the case without a reference: see CEC v. Littlewoods [2001] STC 1568 at 1613. A measure of self restraint may also be required in other cases occasioning the imposition of a higher hurdle (e.g. a substantial prospect of success) having regard not merely to the workload of the European Court, but the consequences of the period of uncertainty prior to the determination by that court on the administration (and most particularly the administration of justice) in this country. A reference does not of course suspend the operation or effect of United Kingdom legislation whose validity is challenged, but good administration may require the greatest caution in its application in the interim period which even in case of an expedited reference may be at least twelve months.

In this case in all the circumstances I consider that the appropriate standard is a substantial prospect of success.

VIRES

The first issue is whether (as contended by the Defendants) the United Kingdom had the vires or power under Community law to enact the Sections in the field of VAT which is regulated by the Sixth Directive (“the Directive”).

The Defendants submit that the power was conferred by Article 21(3) and Article 22(8) of the Directive. It is not suggested that any derogation from the provisions of the Directive was authorised by the Council under Article 27 and accordingly no reference need be made to that article.

Article 21 constitutes Part XII of the Directive which is headed: “Persons liable for payment of tax”. Article 21 (so far as material) provides as follows:

“Persons liable for payment for tax

1

Under the internal system, the following shall be liable to pay value added tax—

(a)

the taxable person carrying out the taxable supply of goods or of services, except for the cases referred to in (b) and (c).

Where the taxable supply of goods or of services is effected by a taxable person who is not established within the territory of the country, Member States may, under conditions determined by them, lay down that the person liable to pay tax is the person for whom the taxable supply of goods or of services is carried out;

(b)

taxable persons to whom services covered by Article 9(2)(e) are supplied or persons who are identified for value added tax purposes within the territory of the country to whom service covered by Article 28b(C), (D), (E) and (F) are supplied, if the services are carried out by a taxable person not established within the territory of the country;

(c)

the person who to whom the supply of goods is made when the following conditions are met—

—the taxable operation is a supply of goods made under the conditions laid down in Article 28c(E)(3),

—the person to whom the supply of goods is made is another taxable person or a non-taxable legal person identified for the purposes of value added tax within the territory of the country,

—invoice issued by the taxable person not established within the territory of the country conforms to Article 22(3).

However, Member States may provide a derogation from this obligation, where the taxable person who is not established within the territory of the country has appointed a tax representative in that country;

(d)

any person who mentions the value added tax on an invoice…;

(e)

any person effecting a taxable intra-Community acquisition of goods. ”

2

By way of derogation from the provisions of paragraph 1—

(a)

where the person liable to pay tax in accordance with the provisions of paragraph 1 is a taxable person who is not established within the territory of the country, Member States may allow him to appoint a tax representative as the person liable to pay tax. This option shall be subject to conditions laid down by each Member State;

(b)

where the taxable transaction is effected by a taxable person who is not established within the territory of the country and no legal instrument exists, with the country in which that taxable person is established or has his seat relating to mutual assistance similar in scope to that laid down by Directives 76/308/EEC and 77/799/EEC and by Council Regulation (EEC) No 218/92 of 27 January 1992 on administrative co-operation in the field of indirect taxation (VAT), Member States may take steps to provide that the person liable for payment of the tax shall be a tax representative appointed by the non-established taxable person.

3

In the situations referred to in paragraphs 1 and 2, Member States may provide that someone other than the person liable for payment of the tax shall be held jointly and severally liable for payment of the tax.

4

On importation, value added tax shall be payable by the person or persons designated or accepted as being liable by the Member State into which the goods are imported.”

Article 22 is the first article in Part XIII of the Directive which is headed: “Obligations of persons liable for payment”. Article 22, after: (1) making provision imposing obligations on Member States to take measures to identify the taxable person and to ensure payment of the tax; (2) authorising Member States to impose conditions on customers of taxable persons in respect of the issue of invoices and requiring the storage of invoices by non-taxable persons; and (3) imposing various obligations on taxable persons relating to invoices and returns and payment of the tax, provides in paragraph 8 as follows:

“Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion, subject to the requirement of equal treatment for domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.”

The first question to be considered is whether (as contended by the Defendants) Article 21.3 authorises Member States to provide that someone other than the person specified in the Article as liable for payment of tax shall be held jointly and severally liable for payment of the tax. The critical words for this purpose are the opening words: “In the situations referred to in paragraphs 1 and 2”.

Mr Peacock for the Defendants submits that the words mean and are synonymous with “in the cases or instances referred to in paragraphs 1 and 2” and accordingly the power is conferred on Member States wherever paragraphs 1 and 2 identify a person liable to pay tax. On this basis, it was open to the UK to provide in all cases that someone other than the specified taxable person shall be jointly and severally liable with the taxable person. In support of this contention he first of all refers me to the use of the word “situation” in Article 16.1. In that paragraph the word is used to refer to factual situations postulated in that Article. He secondly refers me to the predecessor article to Article 21. Mr Peacock points out that in the predecessor article, the draftsman made specific provision in each subparagraph where he desired to confer a right on Member States to impose joint and several liability, but in the current Article 21 he has adopted a different technique and in Article 21(3) sets out the situations where joint and several liability may be imposed. He goes on to say that, if Article 21(3) is not given the wide application for which he contends, Member States no longer have the power conferred by the predecessor article to impose joint and several liability in the case of taxable persons falling within Article 21.1(b).

Maître Waelbroeck for the Claimants submits: (1) that if Mr Peacock is correct, the Article could have totally omitted the opening words in question referring to the situations specified or could have used the formula elsewhere to be found in the Directive: “in the cases referred to”: see e.g. Article 28 p.6; (2) that the word “situations” picks up the four situations postulated in paragraphs 1 and 2 where jurisdiction is expressly conferred on Member States (in paragraph 1(a)) to lay down the person liable to pay tax, (in paragraph 1(c)) to provide a derogation from the obligation, (in paragraph 2(a)) to allow for the appointment of a tax representative and (in paragraph 2(b)) to provide that the person liable shall be a representative; and (3) that Article 21.3 only enables Member States when exercising the jurisdiction conferred in each of those four situations to provide that someone other than the person thereunder made liable for payment of the tax shall be jointly and severally liable for payment.

I consider that the construction by Maître Waelbroek has not merely a substantial prospect of success but indeed is likely to succeed. As regards the argument advanced by Mr Peacock, it seems to me to a degree improbable that the draftsman intended to give Member States the power to make such a fundamental change in the structure of the VAT legislation. It is more probable that the intention was merely to broaden the limited jurisdiction conferred on Member States by that article. I do not find any support for Mr Peacock’s proposition in the use of the word “situation” in article 16.1. Rather that user is consistent with the meaning contended for by Monsieur Waelbroek. Nor do I find any significance in any change in the ambit of the current article from that of its predecessor. The article is substantially reformulated and there is no reason to believe that any material change in its effect was not intended.

I turn to Article 22.8 which is relied on by the Defendants as authorising both the imposition of joint and several liability and the requirement of provision of security for a third person. This article provides that Member States may impose “other obligations which they deem necessary for the correct collection of tax and for the prevention of evasion”.

The heading indicates that Article XIII (unlike Article XII) is concerned, not with identifying persons liable for payment, but with the obligations of the persons liable for payment. In my judgment the paragraph cannot sensibly be read as imposing any obligation on anyone else to pay the VAT due from another taxable person. It goes so far, and so far only, as to impose on persons other than the taxable person limited obligations designed to secure the payment by the taxable person of the VAT due from him and (under Article 22.10) to require Member States to take measures to ensure that non-taxable persons on whom Article 28.a. imposes obligations to pay fulfil those obligations. Article 22(8) cannot therefore be relied on by the Defendants (as they seek to rely on it) to authorise imposition of joint and several liability on third parties. This accords with the heading to the article. At the lowest the Claimants have substantial prospects of success on this issue.

The question however remains what obligations the paragraph authorises the Member State to impose on the taxable person. It is clear, and it is common ground, that it authorises the imposition of the obligation to provide security for his own liabilities. The question raised is whether it authorises the imposition of obligations to secure payment by others of their liabilities. If Article 21(3) confines the right of Member States to impose joint and several liability for payment of the tax to the four situations specified, it is scarcely likely that Article 22(8) can be intended indirectly to confer an unrestricted right to do so. The requirement for the provision of security for a third party’s liability is a requirement for a form of secured guarantee and the assumption in this form of liability for the third party’s liability. Further the language of paragraph 8 is apposite for imposing obligations on the taxable persons necessary for the collection of tax from the taxable person and preventing evasion by him, and not for the collection of tax from and preventing evasion by others.

It is sufficient on this application to hold, as I do, that the Claimants have, not merely an arguable case, but substantial prospects of success in their contention that Article 22.8 does not authorise the legislation requiring provision of security for a third party’s tax liability. If it were necessary I would hold that the Claimants are likely to succeed on this issue.

Mr Peacock submits that the Community legislature has not yet completely and exhaustively harmonised VAT law within the Community and that this accordingly left scope for national legislation such as that in question. He cited to me in this context the Opinion of the Advocate General and the judgment of the European Court in Eismann v. Ufficio Iva [1996] STC 1374. Paragraphs 29 and 35 of the Opinion of the Advocate General reads:

“29.

I think the first part of article 22(8) of the Sixth Directive shows clearly that as regards VAT there is no intention to regulate exhaustively in Community law the formal requirements which may be imposed for the purposes of collection and control. The provisions specifically provide that the Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion. These questions are thus still left basically to the member states.

…

35.

I must also draw attention to the twelfth recital, which shows that the purpose, inter alia, of art 22(8) was to reconcile reduction of administrative formalities for undertakings with effective control measures. Article 22(8) in this connection indicates that it is the member states which, as long as there has been no complete harmonisation of the rules for VAT, are in the best and most immediate position to determine which control measures with regard to transactions within the relevant member state are necessary and appropriate for guaranteeing the member states’ essential fiscal and economic interests in a correct collection of VAT and the prevention of evasion.

36.

To sum up I think in view of all the circumstances that the answer to the question raised should be that the requirement of equal treatment in art 22(8) of the Sixth Directive must be interpreted as meaning that it does not preclude national rules which impose a requirement for accompanying documents in connection with domestic transactions in the member state concerned where no corresponding requirement is imposed with regard to transactions carried out between member states.

Conclusion

37.

In view of the foregoing consideration I suggest that the court should answer the question referred to it by the Commissione Tributaria di Primo Grado di Bolzano as follows:

The requirement of equal treatment in art 22(8) of the Sixth Directive, as amended by EC Council Directive 91/680, must be interpreted as meaning that it does not preclude national rules which impose a requirement for accompanying documents in connection with domestic transactions in the member state concerned, where no corresponding requirement is imposed with regard to transactions carried out between member states.”

The European Court in paragraphs 19 and 20 of its judgment said:

“19.

The Community legislature has not yet completely and exhaustively harmonised the formalities which the member states may impose on internal transactions for the correct collection of VAT and for the prevention of evasion.

20.

Accordingly, art 22(8) of the Sixth Directive, as amended, applies only to transactions between member states in requiring that they be treated in the same way as internal transactions. Consequently, it does not preclude a member state from imposing on transactions internal to that state formalities which are stricter than those applying to intra-Community trade.”

The observations of both the Advocate General and the Court relating to the regulation of formalities is concerned with the last proviso in Article 22.8: it in no way indicates that the Article is concerned only with formalities. Article 22.8 gives broad authority for imposing obligations necessary for the collection of tax due from the taxable person, but not the collection of tax due from anyone else. The Sixth Directive sets the limits of the liabilities of the taxable person. Scope is not left for national legislation to extend those limits.

The question of construction whether the Sections are authorised by Articles 21.3 or 22.8 does not admit of resolution by reference to extrapolated principles drawn from the European Court’s case law. Their authoritative resolution is a matter of great significance in this country and throughout the Community. The Claimants have a very substantial interest in obtaining their resolution and have the necessary prospects of success. There is great urgency in obtaining their resolution on the part of all concerned, most particularly in the war against tax evasion. I therefore direct a reference of those issues to the European Court and request an expedited determination.

CONTRAVENTION OF COMMUNITY LAW

Article 11 of the Directive

The Claimants contend first that the Sections, providing (as they do) for joint and several liability for or requiring the provision of security for the obligations of another trader to pay VAT, offend Article 11 because they give rise to the collection of a greater sum by way of “taxable amount” than the consideration received in respect of a particular supply of goods and services. This ground is without foundation. The effect of the statutory provision is not to increase the taxable amount in respect of any supply by any person: this remains the same, namely the net consideration obtained by the supplier from the customer. Rather the Sections set out to require that the net VAT due from one supplier as the result of his supplies for consideration is in the circumstances specified in the Sections collected from or required to be secured by another supplier. This involves no “double taxation” or collection of “the same VAT twice” nor is the principle of fiscal neutrality breached.

Article 4 of the Directive

The Claimant second contention is that the Sections breach Article 4.1. Article 4.1. defines “taxable person” as meaning any person who independently carries out in any place any economic activity, and Article 4(4) provides that (subject to consultations provided for in Article 29) Member States may treat as a single taxable person persons established in the territory of the country who, though legally independent, are closely bound to one another by financial, economic and organisational links. The Claimants maintain that the Sections are treating as a single taxable person the taxable person and others linked in the chain of supply though not so closely bound and without any such consultations. The answer is that the Sections are doing nothing of the sort. The legislation is laying down obligations of and relating to two economically separate persons. It is only because they are economically separate that the provisions are required.

Disproportionate

The third ground is that the statutory provisions are disproportionate, most particularly in case of Section 18 authorising the imposition of joint and several liability, by reason of three matters. The first is the fact that the Sections themselves and pursuant to the Notices the Commissioners require traders to check the integrity of the supply chain, which is an exercise the Commissioners cannot themselves carry out. But the traders are in a much better position than the Commissioners to obtain the information from their customers and suppliers and there is nothing disproportionate in requiring them to undertake the manageable (if unpalatable) exercise required of them and bear the costs, bearing in mind the challenge facing the VAT system. The second is the rebuttable presumption of the existence of reasonable grounds for suspicion against the taxable person. In the absence of community rules governing the allocation of the burden of proof, it is a matter for the domestic legal system of each Member State to lay down procedural rules such as those concerning burden of proof. Such rules must not be less favourable than those governing similar domestic actions and must not render it impossible or excessively difficult to exercise Community law rights: see e.g. GT Link A/S v. De Danske Statsbaner [1997] ECR 1-04449 at paragraph 24. Most particularly in the context of the war against evasion, the rebuttable presumption is not disproportionate and does not make it impossible or excessively difficult to exercise Community rights. The third is that an entirely innocent trader may be unwittingly involved and duped into becoming part of a fraudulent scheme. But the Notices make clear that there is no risk of liability being attached to an innocent trader who exercises proper care and prudence.

The Claimants contend that the Sections are incompatible with Article 1 of the First Protocol (“Article 1”) and Article 6 of the Convention. I accept the submission of the Defendants that, save in the exceptional case (which is not applicable) where the breach of convention is obvious and inevitable on the face of the legislation, it is not possible or permissible to judge the compatibility of the new legislation with the Convention in a vacuum. Virtually all questions involving the Convention require a balance to be made between the interests of the individual (e.g. in retaining his possessions or in the form of trial proceedings) and the interests of the State (“the public interest”) (e.g. in collecting taxes and preventing evasion). Whether a balance exists has to be judged against the background of the specific facts when the legislation is sought to be applied. The Claimants’ challenge is accordingly premature, but I shall nonetheless consider briefly those challenges.

Article 1 of the First Protocol

The Defendants first contend that the Sections are incompatible with Article 1 which provides that every natural and legal person is entitled to the peaceful enjoyment of his possessions, and that no-one shall be deprived of them except in the public interest and subject to the conditions provided by law and the general principles of international law. The article however goes on to provide that the preceding provision shall not in any way impair the right of a State to enforce such laws as it deems necessary to secure the payment of taxes or other contributions or penalties.

In the field of taxation, it is recognised that the Convention affords Member States a considerable degree of latitude in determining the appropriate measures to levy and collect tax: see Poplar Housing and Regeneration Community Association Ltd v. Donoghue [2000] 3 WLR 183 at paragraph 69 per Lord Woolf CJ. Most particularly: (1) the courts will not readily interfere where a State has made a judgment about the public or general interest, and will only do so if the judgment is manifestly without reasonable foundation, all the more so in tax matters; (2) this is particularly so where the provision complained of has been approved by Parliament with a view to dealing with a particular social or economic problem; (3) the possible existence of effective alternative legislative solutions does not of itself render the contested legislation unjustified; and (4) the courts will only interfere with a decision made by Parliament where it is apparent that Parliament has attached insufficient importance to a person’s Convention rights: see Wilson v. Secretary of State for Trade and Industry [2003] UKHL 40. The fairness of legislation is very much a matter for the national legislature. Something more is required to bring into play the Convention.

The Claimants’ case on Article 1 rests very much on the decision of the European Court of Human Rights in Hentrich v. France (1994) 18 EHRR 440. The court in that case upheld a challenge to French legislation which conferred on the revenue a right of pre-emption entitling it to acquire for the purchase price plus 10 per cent any property which it considered property to have been sold below its real value without allowing the purchaser any right to challenge the revenue’s assessment of value or even to know the reasons for the revenue’s assessment of value. The unfairness of the legislation there in question was extreme: the legislation has fairly been described before me as Kafkaesqe. The Sections in this case bear no resemblance to the French legislation.

The Claimants have suggested that the powers conferred on the Commissioners are arbitrary and can be exercised arbitrarily. There is no substance in the suggestion. The powers conferred must as a matter of public law be exercised in good faith, fairly and (in the Wednesbury sense) reasonably for the purposes for which they are conferred. In the case of the power conferred by Section 17 to require security, it must be exercised for the protection of the revenue against an actual or likely evasion of VAT. In the case of the power conferred to impose joint and several liability, the Commissioners must be able to establish that the taxable person knew or had reasonable grounds to suspect that VAT would be unpaid. The fact that the taxable person is personally innocent of wrongdoing does not render the legislation incompatible with Article 1: see Gasus-Dosier v. Netherlands [1995] EHRR 403. There is no excessive burden on the taxable person or lack of a fair balance. The imposition of a truly rebuttable presumption is not objectionable on these grounds.

Further there can be no question (as suggested by the Claimants) of the Sections failing to satisfy the requirement of precision and foreseeability implied by the concept of law within the meaning of the Convention or of an absence of proportionality. I have already considered the question of proportionality. As regards certainty the Claimants have focussed on the use in the security provisions of the word “likely” and the reference in the joint and several liability provisions to the formula: “the lowest price that might reasonably be expected to be payable for [the goods or services] on the open market”

There can be no sufficient uncertainty for this purpose in the use of the commonly understood term “likely”. Leave aside that on an appeal to the Tribunal the burden is on the Commissioners to satisfy the requirement as to market value and not the taxable person, the formula of open market price is perfectly certain, though on the facts of any particular case its application may afford difficulties in application. The test of legal certainty in this context requires only certainty of concept. The European Court of Human Rights recognises that, whilst a law must be sufficiently accessible and precise to enable the individual affected to understand its scope and foresee its consequences and precision is accordingly desirable, absolute precision is impossible to achieve and attempts to achieve it can result in excessive rigidity which affects its ability to keep pace with changing circumstances. For this reason many laws are couched in terms which are vague and whose interpretation and application are matters of practice: see R v. Shayler [2003] 1 AC 247. There can be no doubt that the criterion laid down by the European Court of Human Rights is satisfied by this legislation.

Article 6 of the Convention

The Claimants contend that the Sections are incompatible with Article 6 of the Convention. This contention is hopeless. The Claimants initially relied on Article 6.1 which relates to civil rights and obligations. But Article 6.1 has no application to ordinary tax matters: see Ferrazzini v. Italy [2001] STC 1314. Long after this answer had been made by the Defendants, realising that this contention was not tenable, the Claimants switched their reliance to Article 6.2 which applies to criminal proceedings. Article 6.2 may apply to a tax matter if the penalty imposed is sufficiently severe: see Janosevic v. Sweden, Application No 34619/97. The process to be followed in determining whether proceedings are criminal is to consider first the legal classification in domestic law, second the nature of the offence and third the nature of the penalty. Each of the exercises referred to leads to one conclusion only, namely that the proceedings in which the right of the Commissioners to require security and to impose joint and several liability is to be determined are civil and not criminal. The proceedings are not classified as criminal in English law. There is no question of a commission of a criminal offence. The civil liabilities arising under the Sections are not criminal penalties or sanctions. But even if Article 6.2 did apply, there can be no doubt that the requirements of that Article would be fully satisfied. The Claimants have an effective right of appeal against any decision of the Commissioners to the VAT and Duties Tribunal (“the Tribunal”) and the Tribunal has a true appellate jurisdiction under sections 83 and 84 of the 1994 Act: see John Dee v. CEC [1995] STC 941 at 952-3. Article 6 does not regulate the burden of proof. A domestic provision would only breach Article 6 if it resulted in an imbalance between the parties: see G v. France Application No 11941/86 57 DR 100. The burden of proof under the Sections gives rise to no want of fairness, equality of arms or reasonable access to a hearing before an independent tribunal.

I accordingly conclude that permission should be given to apply for a declaration that the Sections are not authorised by Community law and the issue of authority should be referred to the European Court. I reject the other grounds of challenge as lacking any foundation. Since the Commissioners are not presently applying the Sections to the Claimants, there is no application for interim relief.