The European Court of Justice declared that, by instituting a scheme which exempted international passenger transport carriers meeting certain criteria from the obligation of keeping VAT accounts, a member state had failed to fulfil its obligations under Council Directive 77/388 (‘the sixth directive’), because it had not adopted ‘simplified procedures for charging and collecting the tax’ but exempted the undertakings concerned from declaring and paying VAT.

Facts

The EC Commission applied to the ECJ for a declaration that, by allowing taxable persons not established in Austria who transported passengers there not to submit tax return forms and not to pay the net amount of value added tax (VAT’) when their annual turnover in Austria was below EUR 22,000, deeming the amount of VAT due to be equal to the amount of deductible VAT and making application of the simplified rules contingent on Austrian VAT not appearing on invoices or in other documents serving as invoices, Austria had failed to fulfil its obligations under art. 2, 6, 9(2)(b), 17, 18 and 22(3)-(5) of Council Directive 77/388 (‘the sixth directive’).

The Commission's reasoning turned on three main arguments which sought to establish that the derogating scheme instituted by the regulation of the national Finance Minister was not covered by art. 24(1) of the sixth directive. Firstly, that scheme applied to undertakings having annual turnover in Austria of less than EUR 22,000, which did not correspond to the concept of ‘small undertakings’ for the purposes of that provision. Secondly, Austria had not shown that such a scheme did not lead to a reduction in tax. Finally, that provision authorised member states to apply simplified procedures, but did not permit them to grant total exemption to the undertakings concerned.

Austria disputed those objections and maintained that the specific scheme laid down for international passenger transport carriers not established in Austria whose turnover there was less than EUR 22,000 was covered by art. 24(1) of the sixth directive which gave member states the option of applying a special scheme to small undertakings.

Issue

Whether the scheme instituted by Austria might be regarded as having established ‘simplified procedures for charging and collecting the tax’ within the meaning of art. 24(1), whether it resulted in a reduction in tax and whether it applied only to ‘small undertakings’.

Decision

The European Court of Justice (Third Chamber) (ruling accordingly) said that, like the other special schemes provided for in art. 25 and 26 of the sixth directive, the scheme under art. 24 had to be applied only to the extent necessary to achieve its objective. Moreover any exception to or derogation from a general rule was to be interpreted strictly. Furthermore, contrary to the submissions of Austria, it could not be inferred from the judgment in Direct Cosmetics Ltd and Laughtons Photographs Ltd v C & E Commrs (Case 138/86) [1988] BTC 5,186; [1988] ECR 3937 that the member states enjoyed a broad power of assessment in the choice of simplified procedures which they decided to introduce with regard to VAT. In that judgment the court had considered solely the scope of the power of assessment enjoyed by a member state when deciding whether or not to adopt simplified procedures under art. 24(1).

The scheme instituted in this case exempted international passenger transport carriers meeting certain criteria from the obligation of keeping VAT accounts. Since they were not required to issue invoices showing VAT, those carriers might apply an average rate to the turnover achieved in Austria equivalent to that which was deductible but, in that case, they might no longer claim other deductible amounts in the refund procedure. Such an exemption thus meant that the VAT was neither declared nor paid.

Article 24(1) provided that member states had the option ‘of applying simplified procedures such as flat rate schemes for charging and collecting the tax’. The wording of the provision did not show that they might exempt small undertakings totally from their obligation to pay VAT, since it permitted the charging procedures merely to be simplified and made no mention of any possibility of exempting the undertaking concerned entirely from VAT. Moreover, in the case of an exemption such as that laid down by the regulation of the Finance Minister, the VAT was not charged, so that the ‘charging procedures’, even very simplified ones, to which that provision expressly referred no longer existed. In addition, the ‘flat-rate schemes’ referred to as examples of simplified charging procedures were an illustration of the fact that, under the arrangement envisaged by that provision, undertakings were actually required to pay VAT. Thus the concept of ‘simplified procedures’ could not include a total lack of charging and collecting of the tax.

That interpretation was supported by art. 24(2)–(5) of the sixth directive which referred expressly to the member states’ option to apply an ‘exemption from tax’, whereas art. 24(1) did not. The absence of an express reference suggested that tax exemptions were not included in the simplified charging procedures which might be implemented by the member states under art. 24(1).

It followed that the scheme instituted by the regulation of the Finance Minister exceeded the powers enjoyed by the member states under art. 24(1), since it did not adopt ‘simplified procedures for charging and collecting the tax’ but exempted the undertakings concerned from declaring and paying VAT.

European Court of Justice (Third Chamber).

Judgment delivered 28 September 2006.