Parties Grounds Operative part

In Case C‑288/07,

REFERENCE for a preliminary ruling under Article 234 EC from the Chancery Division of the High Court of Justice of England and Wales (United Kingdom), made by decision of 6 March 2007, received at the Court on 14 June 2007, in the proceedings

The Commissioners of Her Majesty’s Revenue & Customs

v

Isle of Wight Council,

Mid-Suffolk District Council,

South Tyneside Metropolitan Borough Council,

West Berkshire District Council,

THE COURT (Grand Chamber),

composed of V. Skouris, President, P. Jann, C.W.A. Timmermans, A. Rosas and K. Lenaerts, Presidents of Chambers, G. Arestis, U. Lõhmus, A. Borg Barthet, M. Ilešič, J. Malenovský, E. Levits, A. Ó Caoimh and A. Arabadjiev (Rapporteur), Judges,

Advocate General: M. Poiares Maduro,

Registrar: C. Strömholm, Administrator,

having regard to the written procedure and further to the hearing on 1 April 2008,

after considering the observations submitted on behalf of:

– the Isle of Wight Council, Mid-Suffolk District Council, South Tyneside Metropolitan Borough Council and West Berkshire District Council, by J. Ghosh QC, J. Henderson, Barrister, R. Genn, Solicitor, and L. Leach, adviser,

– the Government of the United Kingdom of Great Britain and Northern Ireland by Z. Bryanston-Cross, acting as Agent, and by C. Vajda QC and B. Rayment, Barrister,

– Ireland, by D. O’Hagan, acting as Agent, assisted by A. Aston SC, and N. Travers, BL,

– the Italian Government, by I.M. Braguglia, acting as Agent, assisted by G. De Bellis, avvocato dello Stato,

– the Commission of the European Communities, by R. Lyal and M. Afonso, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 12 June 2008,

gives the following

Judgment

1. This reference for a preliminary ruling concerns the interpretation of the second subparagraph of Article 4(5) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p 1; ‘the Sixth Directive’).

Legal context

3. Article 2 of the Sixth Directive, in Title II thereof, entitled ‘Scope’, provides:

‘The following shall be subject to value added tax:

1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;

…’

‘1. “Taxable person” shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.

…

5. States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions.

However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition.

In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided they are not carried out on such a small scale as to be negligible.

Member States may consider activities of these bodies which are exempt under Article 13 or 28 as activities which they engage in as public authorities.’

5. Annex D to the Sixth Directive, to which the third subparagraph of Article 4(5) of the Sixth Directive refers, lists 13 types of activities. However, the provision of off-street parking is not among them.

6. Article 4(5) of the Sixth Directive, the direct effect of which was recognised by the Court in Joined Cases 231/87 and 129/88 Comune di Carpaneto Piacentino and Others [1989] ECR 3233, paragraph 33, has not been transposed into the law of the United Kingdom.

The dispute in the main proceedings and the questions referred for a preliminary ruling

7. The local authorities concerned provide off-street car-parking facilities. The private sector also provides like facilities.

8. Historically, the local authorities in the United Kingdom accepted that they were accountable for VAT on their revenue from the provision of off-street parking. However, following the decision in Case C‑446/98 Fazenda Pública [2000] ECR I‑11435, some 127 local authorities made claims for repayment of the VAT they had previously paid, taking the view by reason of the first subparagraph of Article 4(5) of the Sixth Directive that they should not have been accountable for that VAT. The total of the claims made for repayment amounts to GBP 129 million. As regards the total sum which could be reclaimed, it is stated in the order for reference that there are some 468 local authorities in the United Kingdom of Great Britain and Northern Ireland.

9. In the cases in the main proceedings, the claims amount to GBP 1.6 million. The referring court indicates that these cases are test cases as the local authorities concerned form a representative cross-section of all local authorities. The Isle of Wight Council, Mid-Suffolk District Council, South Tyneside Metropolitan Borough Council and West Berkshire District Council administer, respectively, an island, a rural area, an urban area and a provincial region.

10. Since the local authorities concerned concluded that under a correct interpretation of Community law they were not subject to VAT for the activities in question, they claimed repayment of the VAT previously paid. However, the Commissioners refused such repayment. Consequently, those local authorities appealed against the Commissioners’ decision to the VAT and Duties Tribunal, London. Having held that the question of the exemption from VAT of bodies governed by public law on the basis of the second subparagraph of Article 4(5) of the Sixth Directive must be dealt with separately for each of the local authorities concerned, that is on a ‘taxable person by taxable person’ basis, the VAT and Duties Tribunal, London, concluded that the exemption of those authorities from VAT did not lead to significant distortions of competition. Each of those authorities was thus exempt from VAT in respect of its revenue from the provision of off-street parking.

11. The Commissioners appealed against the decision of the VAT and Duties Tribunal, London, to the Chancery Division of the High Court of Justice of England and Wales. Their principal argument is that Article 4(5) of the Sixth Directive is of national scope which requires that there should be an investigation of the nationwide impact on the private sector generally of the exemption of local authorities from VAT on the provision of off-street parking. Their appeal also concerns the meaning of the words ‘would lead to’ and ‘significant’ in the passage comprised of the words ‘where treatment as non-taxable persons would lead to significant distortions of competition’ in the second subparagraph of Article 4(5) of the Sixth Directive.

12. In those circumstances the Chancery Division of the High Court of Justice of England and Wales decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:

‘1. Is the expression “distortions of competition” to be ascertained on a public body by public body basis such that, in the context of the present case, it should be determined by reference to the area or areas where the particular body in question provides off-street parking or by reference to the totality of the national territory of the Member State?

2. What is meant by the expression “would lead to”? In particular, what degree of probability or level of certainty is required for that condition to be satisfied?

3. What is meant by the word “significant”? In particular, does “significant” mean an effect on competition that is more than trivial or de minimis , a “material” effect or an “exceptional” effect?’

The questions referred for a preliminary ruling

The first question

Observations submitted to the Court

13. The local authorities concerned submit that the expression ‘distortions of competition’ is properly to be ascertained on a public body by public body basis, such that, in the context of the present case, it should be interpreted by reference to the area or areas where the particular body in question provides off-street parking and not by reference to a hypothetical market which encompasses the totality of the national territory of any particular Member State. A contrary approach would be inconsistent with the very concept of ‘competition’. The VAT exemption conferred on each of those authorities does not lead in any way to distortions of competition in relation to private providers or local authorities in, for example, Glasgow, let alone to ‘significant’ distortions. Similarly, a person who wished to shop on the Isle of Wight would not park his vehicle in Manchester.

14. The United Kingdom Government, relying especially on the fundamental principles of fiscal neutrality and legal certainty, submits that as a matter of principle, ‘the activities’ approach, that is taking account of the entire national market and not of each local market, is the most sensible approach to the interpretation of the second subparagraph of Article 4(5). The local nature of demand means that even in an area within a given local authority, several local markets could exist in some of which there might be competition, while there might be no competition in others.

15. In Ireland’s submission, it is clear from the Court’s case-law that the Member States are free to choose the appropriate method for transposing the second and third subparagraphs of Article 4(5) of the Sixth Directive into national law. It is for each Member State to determine the activities engaged in by the State or public entities which, if not subjected to VAT, would lead to significant distortions of competition. The Member States may, thus, adopt local, regional or nationwide approaches.

16. The Italian Government suggests that principles specific to the field of competition be applied. In that regard, it refers to the Commission’s Notice on the definition of relevant market for the purposes of Community competition law (OJ 1997 C 372, p. 5) and concludes, on that basis, that the relevant geographic market cannot be the entire national market. In matters of off-street parking there cannot be any conceivable competition between the parking facilities offered by different towns.

17. The Commission of the European Communities takes the view that it is the nature of the activity, and not the local conditions of competition, that has to be taken into account to assess the likelihood of distortions of competition. That such an approach is correct may be inferred from the fact that the third subparagraph of Article 4(5) of the Sixth Directive provides that the activities listed in Annex D thereto are in any event to be subjected to VAT, unless they are negligible. In doing so, the Sixth Directive clearly proceeds on the basis that the relationship of competition and the consequent likelihood of distortions fall to be determined in the abstract, having regard to the activity as such and without reference to local conditions.

The Court’s reply

18. At the outset, it must be noted that, under the first subparagraph of Article 4(5) of the Sixth Directive, States, regional and local government authorities and other bodies governed by public law are not to be considered taxable persons in respect of the activities or transactions in which they engage as public authorities.

20. As regards the first of those conditions, it is common ground that the local authorities concerned are bodies governed by public law within the meaning of Article 4(5) of the Sixth Directive.

22. In view of the nature of the analysis to be carried out, it is for the national court to classify the activity at issue in the main proceedings in the light of the criterion adopted above ( Comune di Carpaneto Piacentino and Others , cited above, paragraph 16; Case C-4/89 Comune di Carpaneto Piacentino and Others [1990] ECR I‑1869, paragraph 11; and Fazenda Pública , paragraph 23).

23. Since the question whether, in the cases in the main proceedings, the local authorities concerned were acting as public authorities has not been referred to the Court, it is appropriate to start from the hypothesis, subject to verification by the referring court, that the activity in question in the main proceedings must be regarded, for the purposes of this reference for a preliminary ruling, as coming within Article 4(5) of the Sixth Directive.

24. It must also be noted that, even where local authorities carry on such an activity as public authorities, they are, under the second subparagraph of Article 4(5) of the Sixth Directive, to be considered taxable persons where their treatment as non-taxable persons would lead to significant distortions of competition. The referring court is asking, in that respect, whether those distortions are to be evaluated by reference to the local market on which each of the local authorities concerned operates or by reference to the activity, as it is carried on throughout the national territory.

29. However, only activities of an economic nature are covered by that provision (see, to that effect, Case C‑306/94 Régie dauphinoise [1996] ECR I‑3695, paragraph 15; Case C‑77/01 EDM [2004] ECR I‑4295, paragraph 47; Case C‑465/03 Kretztechnik [2005] ECR I‑4357, paragraph 18; and T-Mobile Austria and Others , cited above, paragraph 34).

41. That conclusion is supported by the general principles of Community law applicable to fiscal matters, such as the principles of fiscal neutrality and legal certainty.

46. On the other hand, if those distortions are analysed by reference to the activity as such, irrespective of the conditions of competition prevailing on a given local market, compliance with the principle of fiscal neutrality is ensured, given that all bodies governed by public law are either taxable or non-taxable persons, the sole strain on that principle concerning only relations between those bodies and private operators, and that to the extent that the distortions of competition remain insignificant.

The second question

54. By its second question, the referring court is asking, in essence, whether the expression ‘would lead to’ significant distortions of competition, within the meaning of the second subparagraph of Article 4(5) of the Sixth Directive, is to be interpreted as encompassing only actual competition or as extending also to potential competition. That court is also asking for clarification as to what degree of probability is required for that condition to be satisfied.

Observations submitted to the Court

55. Relying on Paragraph 139 of Advocate General Kokott’s Opinion in Case C‑369/04 Hutchison 3G and Others [2007] ECR I‑5247, the local authorities concerned maintain that the expression ‘would lead to’ is to be interpreted as requiring a real risk of material distortions of competition.

56. The United Kingdom Government submits that the expression ‘would lead to’ is interchangeable with the expression ‘could lead to’, which the Court used in the above-cited judgments in the two Carpaneto Piacentino and Others cases and which is also consistent with Advocate General Kokott’s analysis in paragraphs 127 and 131 of her Opinion in Hutchison 3G and Others , cited above. It adds that there is already, on the one hand, competition between private companies and local authorities in many areas of the United Kingdom as well as, on the other hand, potential competition in other areas where there are, as yet, no private operators.

57. In Ireland’s submission, the expression ‘would lead to’ requires the relevant national authorities charged with applying Article 4(5) of the Sixth Directive to be satisfied that an apprehended distortion of competition must be likely as a matter of probability rather than something that merely could or might result.

58. The Italian Government submits that, while absolute certainty is not necessary, the expression ‘would lead to’ must be understood as meaning that the risks of distortions of competition arising from the carrying-on of an activity which is not subject to VAT represent a strong probability and not a mere possibility.

59. The Commission contends that, in order to ensure that public bodies and private operators are placed on an equal footing in relation to the conditions of competition, there should be no barrier to the entry of private traders on to the market in question in the main proceedings. The Commission therefore submits that the expression ‘would lead to’ includes potential competition. It is sufficient, in that regard, that there be a real possibility for private traders to enter that market in competition with the relevant bodies governed by public law.

The Court’s reply

The third question

66. The third question concerns the interpretation to be given to the word ‘significant’, for the purposes of the second subparagraph of Article 4(5) of the Sixth Directive, and, in particular, whether it is to be interpreted as meaning ‘more than trivial or de minimis ’, or ‘material’ or even ‘exceptional’.

Observations submitted to the Court

67. The local authorities concerned submit that the word ‘significant’ means ‘a materially adverse effect’ or ‘exceptional effect’ on the public sector body’s competitors, or an effect other than the simple fact that the public body does not charge VAT while its private sector competitors do charge it. They rely, in that regard, on Paragraph 41 of Advocate General Jacobs’ Opinion in Case C-378/02 Waterschap Zeeuws Vlaanderen , cited above, according to which the word ‘significant’ is a synonym for ‘exceptional’.

68. The United Kingdom Government contends that the word ‘significant’ means any distortion of competition that is not insignificant or de minimis . It adds, in relation to the use of the word ‘exceptional’ by Advocate General Jacobs in Paragraph 41 of his Opinion in Waterschap , that the Court did not endorse his analysis and did not repeat that word.

69. In Ireland’s submission, the word ‘significant’ means that the distortions of competition must be important and appreciable, in the sense of likely to create a considerable alteration of the conditions of competition otherwise applicable on the market in question to the clear detriment of the affected taxable private operators.

70. The Italian Government submits that the word ‘significant’ is to be interpreted as meaning ‘at least material and not merely negligible’.

71. The Commission takes the view that the word ‘significant’ refers to a distortion that is not insignificant or negligible. It relies, in that regard, on the third subparagraph of Article 4(5) of the Sixth Directive, read in conjunction with Annex D thereto, according to which the activities listed in that annex are to be subject to VAT ‘provided they are not carried out on such a small scale as to be negligible’. The function of the third subparagraph is, in any event, to make subject to VAT certain categories of activities which would otherwise have to be assessed under the second subparagraph of Article 4(5). Those two subparagraphs follow the same logic and it may be inferred that in using the word ‘negligible’ the legislature intended to describe activities which do not lead to ‘significant’ distortions of competition.

The Court’s reply

74. If that word had to be understood as meaning ‘material’, or even ‘exceptional’, the scope of the treatment of bodies governed by public law as non-taxable persons would be unduly enlarged. On the other hand, if their treatment as such were allowed only in cases where it would lead only to negligible competition, that scope would be circumscribed effectively.

75. Moreover, under the third subparagraph of Article 4(5) of the Sixth Directive, bodies governed by public law are taxable persons for the activities listed in Annex D thereto, provided they are not carried out on such a small scale as to be ‘negligible’. In other words, the treatment of those bodies as non-taxable persons is permitted provided that those activities are negligible, assuming thus that the distortions of competition which would result would also be negligible.

77. Finally, compliance with the principle of fiscal neutrality supports that interpretation. The argument put forward by the local authorities concerned that bodies governed by public law should be subjected to VAT only in cases where the distortions of competition resulting from their treatment as non-taxable persons are material, or even exceptional, would create a fiscal situation in which a significant number of private operators effecting the same transactions as those carried out by those bodies would be treated differently from them in respect of the levying of VAT, which would constitute a significant impairment of the principle of fiscal neutrality.

78. By contrast, the treatment of those bodies as non-taxable persons, in circumstances where it would not lead to any distortion of competition or lead only to negligible distortions, would bring about the least possible damage to the principle of fiscal neutrality.

Costs

80. Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

On those grounds, the Court (Grand Chamber) hereby rules:

1. The second subparagraph of Article 4(5) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment is to be interpreted as meaning that the significant distortions of competition, to which the treatment as non-taxable persons of bodies governed by public law acting as public authorities would lead, must be evaluated by reference to the activity in question, as such, without such evaluation relating to any local market in particular.

2. The expression ‘would lead to’ is, for the purposes of the second subparagraph of Article 4(5) of Sixth Council Directive 77/388, to be interpreted as encompassing not only actual competition, but also potential competition, provided that the possibility of a private operator entering the relevant market is real, and not purely hypothetical.

3. The word ‘significant’ is, for the purposes of the second subparagraph of Article 4(5) of Sixth Council Directive 77/388, to be understood as meaning that the actual or potential distortions of competition must be more than negligible.