Unperturbed by the High Court’s initial dismissal, ex parte, of their attempt to judicially review HMRC’s VAT exemption for postal access services provided by Royal Mail, TNT applied for an oral hearing and have now been granted permission to challenge the VAT exemption by way of judicial review (R (on the application of TNT Post UK Limited) v Commissioners for HM Revenue & Customs (defendant) and Royal Mail Group Limited (Interested Party)1).  

The dispute concerned whether access services provided by Royal Mail benefit from the exemption from VAT for universal postal services. TNT were arguing that the exemption currently afforded to Royal Mail directly, and indirectly, distorts competition for postal services and confers an unfair advantage on Royal Mail.

Background

Article 132(1)(a) of the Principal VAT Directive exempts from VAT:  

“the supply by public postal services of services other than passenger transport and telecommunications services, and the supply of goods incidental thereto.”  

The UK legislation which currently gives effect to the exemption is Group 3 of Schedule 9 of the Value Added Tax Act 1994 (VATA 1994), which provides that the following is exempt:  

“1. The supply of public postal services by a universal service provider.

2. The supply of goods by a universal service provider which is incidental to the supply of public postal services by that provider.”

Postal services can be categorised into “upstream services”, such as collection, sorting, processing and delivery to the local Royal Mail depot, and “downstream services,” which are the final leg of delivery from the depot to the recipient’s address. The provision of downstream services by Royal Mail to other providers such as TNT is referred to as “access services”.  

The ECJ had already considered the scope of the exemption for public postal services, in the context of a previous judicial review challenge brought by TNT (TNT Post UK Ltd v Revenue and Customs Commissioners (C-357/07)), albeit on different grounds. The ECJ held that public postal services in Directive 77/388 article 13A(1)(a) (the predecessor to article 132(1)(a) of the Principal VAT Directive) covered operators, whether public or private, who undertook to provide all or part of the universal postal service as defined in article 3 of the Postal Services Directive. The exemption did not apply to supplies of postal services for which the terms had been individually negotiated.

A key passage from the ECJ judgment is contained in paragraph 49:  

“…the exemption provided for in article 13A(1)(a) of the Sixth Directive applies to the supply by the public postal services acting as such – that is, in their capacity as an operator who undertakes to provide all or part of the universal postal service in a member state – of services other than passenger transport and telecommunications services, and the supply of goods incidental thereto. It does not apply to the supply of services or of goods incidental thereto for which the terms have been individually negotiated.”

TNT’s submissions

TNT’s position is that access services are not universal postal services since the terms on which the services are provided are freely negotiated (and this point was common ground). In TNT’s view, the effect of the ECJ ruling is that the exemption in the Principal VAT Directive is limited to services which fall strictly within the description of universal postal services. Access services are therefore excluded.  

HMRC and Royal Mail’s submissions

HMRC and Royal Mail contended firstly that the ECJ had not ruled that the exemption is restricted only to those services falling within the description of universal postal services. Secondly, HMRC and Royal Mail argued that the relevant test was whether particular services were supplied by the universal services provider in its capacity as such, that is, under the legal regime which applied especially and uniquely to the provider of universal postal services (access services, whilst not fitting the description of universal postal services are nonetheless subject to regulation). Thirdly, they contended that the access services provided by Royal Mail derived directly from Royal Mail’s status as the provider of universal postal services in the UK. Fourthly, they argued that the fact that access services are regulated demonstrated the close connection between access services and the services of universal postal supply. Finally, HMRC and Royal Mail contended that the provision of access services, under regulated terms, has a powerful public interest rationale, namely that it enables operators, such as TNT, to gain access to Royal Mail’s infrastructure.  

The decision

After hearing from both parties, the judge was satisfied that TNT’s submissions were at least arguable and granted permission to bring judicial review proceedings. The judge also considered that a further ECJ reference would be desirable to determine the scope of the universal postal services exemption, because in the previous reference the ECJ had not addressed the status of access services.  

Comment

A further ECJ reference is clearly necessary now that permission has been granted for these proceedings and confirmation of the correct position will be welcome.

In the right circumstances, judicial review can provide taxpayers with important safeguards. This case demonstrates that claimants should not simply give up if an application for judicial review is initially dismissed by a judge reading the papers without the benefit of oral argument from the taxpayer. Claimants are entitled to request an oral hearing, and as this case makes clear, judges are willing to reconsider the merits of an application in the light of oral submissions.

See http://www.bailii.org/ew/cases/EWHC/Admin/2012/3380.html for full details of the case.