The Court of Appeal held that the supply by the taxpayers of storage facilities for the personal luggage of passengers at UK airports was not a zero-rated supply of services for VAT purposes. The taxpayers failed to show that the services supplied by them were within the derogation provisions of art. 28(2) of Council Directive 77/388 (the sixth directive) entitling the UK to maintain zero-rated services. The relevant items in VATA 1994, Sch. 8, Grp. 8 had to be construed so far as possible in accordance with the provisions of art. 15 of the directive which the items implemented and on that basis the services did not qualify for zero-rating.

Facts

The taxpayers provided storage facilities for the personal luggage of passengers at a number of UK airports. They accounted for VAT on the charges made for those services at the standard rate. In October 2003, the taxpayers claimed that their charges should have been zero-rated. Thereafter they claimed substantial refunds of VAT overpaid. They contended that their services fell within VATA 1994, Sch. 8, Grp. 8, items 6(b) and 11 (a) and should therefore have been zero-rated under s. 30.

Customs argued that the services were standard-rated, since items 6(b) and 11 (a) had to be interpreted by reference to art. 15(9) and (13) of the sixth directive. The tribunal allowed an appeal by the taxpayers in part ([2006] BVC 4,097; Decision No. 19,627). The High Court dismissed an appeal by Customs and allowed a cross-appeal by the taxpayers ([2007] BTC 5,498), holding that the relevant exemptions in the 1994 Act were not enacted to implement the provisions in art. 15 of the directive and so did not have to be construed in conformity with them, but were referable to transitional derogation provisions in art. 28 of the directive, under which member states were entitled to maintain in force certain historic exemptions from VAT.

Customs appealed arguing that art. 28 was irrelevant to the construction of the relevant storage services which were zero-rated by the items in Grp. 8 of Sch. 8 and did not displace the duty of the court to construe the items so as to be compatible with art. 15(9) and (13) of the directive. On that basis the supplies of services were not zero-rated within art. 15(9) because they did not meet ‘the direct needs of aircraft or their cargoes’ and were not zero-rated within art. 15(13) because they were not ‘directly connected’ with the export or imports of the goods, i.e. the personal luggage.

Issue

Whether the storage services supplied by the taxpayer were zero-rated for VAT purposes.

Decision

Mummery LJ (Dyson LJ and Lindsay J concurring) (allowing the appeal) said that the legislative history and the preparatory legislative materials established that the purpose of the relevant national amending legislation was to make national law compatible with the directive. The materials established that the purpose of amending the items in 1990 by the addition of zero-rating for storage was the better implementation of the art. 15 mandatory exemptions in the directive. There was no reference at all in the materials to the derogation provisions in art. 28 of the directive. The exemptions introduced in the national legislation would not come within art. 28, as they involved extending the exemptions. They were not simply maintaining in national legislation historic zero-rated provisions. If proper account was taken of those materials and of the terms of art. 28 itself, this was not a derogation case free from the principle of compatible construction. On the contrary, this was a case of implementing legislation, which attracted the application of the principle.

On its true construction, the services supplied by the taxpayers did not fall within art. 15(9) as they did not meet the direct needs of aircraft or of their cargoes. It was common ground that the passengers' luggage stored by the taxpayers was not aircraft cargo. The storage services supplied did not meet ‘the direct needs’ of aircraft which referred to services necessary to the operation of the aircraft. It was 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 were not those of aircraft or their cargoes at all, but those of the passengers who, for one reason or another, had not checked in and consigned to the operators of the aircraft their luggage for transportation on their aircraft flights. Until that had been done, the services supplied by the taxpayers were for the convenience of the passengers, not to meet the direct needs of aircraft or their cargoes (Berkholz v Finanzamt Hamburg-Mitte-Altstadt (Case 168/84) [1986] BTC 5,011; [1985] ECR 2251).

For similar reasons the services supplied did not fall within art. 15(13). They were not ‘directly connected’ with the import or export of the passengers' luggage. That direct connection did not begin until the passengers had checked in their luggage for their flight and consigned it to the aircraft operator. Once they had done that there was a direct connection with the export of the luggage by transportation and ancillary operations.

Taken on its own, item 6(b) could be read as covering the services supplied by the taxpayers. Customs accepted that ‘goods’ included personal luggage. Given the finding that the facilities for storage supplied by the taxpayers were used in respect of goods, 95 per cent of which had been or were to be carried on an aircraft, personal luggage could fall within item 6 as ‘goods carried in aircraft’. However, the provisions in art. 15(9) governed the construction of the implementing provision in item 6(b). If possible, item 6(b) had to be construed compatibly with the directive requirement of the ‘direct needs of aircraft or of their cargoes’. It could be construed compatibly in accordance with the principles in Marleasing SA v La Comercial Internacional de Alimentacion (Case C-106/89) [1990] ECR I-4135 by reading into the item the core concept in art. 15(9) of storage to meet ‘the direct needs’ of aircraft or of their cargoes. Thus Customs' appeal on that point succeeded. There was nothing in item 6(b) that was incompatible with that concept of ‘direct needs’. Although the concept had not found verbal expression in the item, it was 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 art. 15(13) governed the construction of item 11(a). As with item 6(b), it was not a matter of inserting in the implementing provision the very wording of art. 15 to achieve a compatible construction of the items in the Schedule and the art. 15 provisions. The point was that there was nothing in the item which made it impossible to read in the requirement of a direct connection between the storage and the place at which the goods were to be exported or imported. The taxpayers could not avoid that construction by bringing its case within the derogation provisions of art. 28, which only permitted member states to ‘maintain’ certain exemptions.

Court of Appeal (Civil Division).

Judgment delivered 14 May 2008.