In Isle of Wight Council & Ors v HMRC [2015] EWCA Civ 1303, the Court of Appeal has dismissed an appeal by four local authorities (the Appellants) against a decision of the Upper Tribunal (UT), and confirmed that a local authority which charges members of the public for off-street car parking (OSCP) is not a non-taxable person for VAT purposes.

Background

The issue of principle raised in the appeal (the proceedings are in the nature of test cases as there are many local authorities which have the same issue) was whether a local authority which charges members of the public for OSCP is a non-taxable person for VAT purposes. The answer to this question turned on whether treating the authority as a non-taxable person “would lead to significant distortions of competition” within the meaning of Article 4.5(2) of the Sixth Council Directive (77/388EEC), replaced in substantially similar form by Article 13 of the Principal VAT Directive (2006/112/EC) (the Directive).

The Appellants appealed to the First-tier Tribunal (FTT) a decision of HMRC that they were not taxable persons for the purposes of recovering VAT on the OSCP charges. HMRC had refused the Appellants’ claims to recover VAT under section 80, Value Added Tax Act 1994, in respect of the OSCP supplies. 

The FTT’s decision

The issue before the FTT was whether local authorities were entitled to be treated as nontaxable persons, which depended upon whether treating them as non-taxable persons would lead to significant distortions of competition within the meaning of the Directive. 

The FTT concluded that the non-taxation of local authorities would distort competition in the OSCP market in the areas of pricing and outsourcing, so that fewer commercial car parks would remain open and more local authority car parks would open in pursuance of the local authorities’ duty to ensure adequate parking provision under section 122, Road Traffic Regulation Act 1984 (RTRA). The Appellants appealed to the UT.

The UT’s decision

Before the UT, the Appellants contended that the FTT had misunderstood the legal framework governing the setting of local authority OSCP charges. They argued that there was no causal connection between increased revenue through non-taxation and lower OSCP charges and that the FTT had wrongly inferred that they could set OSCP charges at a level which would raise income for other traffic management purposes.

The UT found that if local authority OSCP was not taxed, local authorities would not need to consider raising their charges in the event of a VAT increase, whereas commercial providers would be compelled to do so, which supported the FTT’s finding, as a fact, that the absence of taxation would reduce upward pressures on local authority charging. As to the provision of outsourcing, the UT said that there would be a significant difference of approach if commercial provision was taxed but local authority provision was not. It concluded that the FTT’s finding that local authorities did not disregard the incidence of taxation when deciding whether and how to outsource a car park, or its management, was a finding of fact not based on any misunderstanding of the relevant law. It therefore dismissed the Appellants’ appeal. The Appellants appealed to the Court of Appeal.

The Court of Appeal’s decision

Before the Court of Appeal, the Appellants contended that the FTT and UT had failed to take into account two overriding considerations. First, that the OSCP charges were paid into, and expenditure for OSCP was taken from, a local authority’s general fund established under section 91, Local Government Finance Act 1988 and secondly, that the pricing of OSCP was informed by numerous policy considerations related to the policy objections in section 122.

They submitted that had those matters been properly considered, the FTT and UT would have been bound to conclude that HMRC could not discharge the burden on it of showing that in the hypothetical, notional market for OSCP, in which there was no VAT payable on local authority provision of OSCP, the absence of VAT would have a causal connection with a significant distortion of competition.

The Court rejected the Appellants’ arguments that the cost to them of providing OSCP could only be taken into account in fixing OSCP charges for the purpose of ensuring that they do not trade with a view to raising finance for their general activities. The Court did not accept that, as a matter of law, the cost of providing OSCP can only be taken into account, if at all, only after all other matters relevant to setting OSCP charges had been factored in. The Court found nothing in the legal framework precluding local authorities from relating the OSCP charge to the cost of providing OSCP and nothing wrong with the FTT’s conclusion to that effect.

The Court considered that if authorities had no liability to pay VAT on OSCP charges, they would be able to provide OSCP while charging less to those using that facility. The Court noted the FTT’s finding that authorities would do precisely that by not increasing charges in line with inflation, reducing them in real terms over time. It further noted the FTT’s finding that, in the hypothetical “non-taxation world”, the downward pressure on OSCP charges resulting from authorities’ wish to contribute to the economic vitality of their areas through favourable pricing would have brought charges to a level lower than in the “taxation world” by a margin approaching the VAT fraction. The Court commented that if one OSCP supplier could have lower prices over time because of its special tax status, that was likely to distort competition.

The Court therefore dismissed the appeal.

Comment

The critical issue in this appeal was whether the FTT had made an error of law in the light of its factual findings. The FTT’s conclusion that, in a hypothetical world in which VAT had never been imposed on OSCP charges, those charges would have been lower, was based on two principal matters: (a) in fixing the level of charges, local authorities were bound to have regard to the need to meet costs; (b) if VAT had never been payable on OSCP charges, local authorities would have been able to, and would have wished to, keep charges lower in order to boost the local economy by attracting shoppers with cars while maintaining the same spending priorities and the same allocation of the general fund as between the different activities financed out of the general fund. Local authorities had to be permitted to set OSCP charges with a view at least to covering the cost of operating loss-making or free car parks. In the view of the Court of Appeal, it could not be said that the FTT’s conclusions were plainly wrong or outside the bounds within which reasonable disagreement was possible and accordingly it is not surprising that given this view the appeal was unsuccessful.

This decision is not all bad news for local authorities. The need to establish a distortion of competition has been recognised. It is not sufficient to simply show that the services provided by the local authority are similar to services provided by the private sector.  However, once competition has been shown, the bar for distortion as a result of non-taxation is very low.

The Court of Appeal’s judgment is available to view here