Local Authorities and VAT - HMRC v Isle of Wight Council
30 October 2008
EU Law allows Member States to provide that supplies made by public bodies, which would otherwise be taxable for VAT purposes, are non-taxable. A Member State may only do so where there would not be a distortion of competition. The case of Revenue & Customs Commissioners v Isle of Wight Council highlights the difficulties that arise in such circumstances. The case was appealed to the High Court and the High Court sought a ruling from the European Court of Justice on the parameters of the ability of Member States to exempt local authorities from VAT.
The case concerned parking charges. These were imposed by the local authority but private sector providers also supplied parking services. The private sector providers had to account for VAT and in that way were at a commercial disadvantage to the local authority providing the same service.
It will be for the UK Courts to decide the substantive issues of the case applying the law as interpreted by the ECJ. The ECJ ruled that when deciding whether there was a distortion of competition, no account should be taken of the actual local market. Therefore, it would seem that evidence that unfair competition has arisen on the Isle of Wight will not be relevant. Rather it is the nature of the activity which will be considered. It is not clear from the case exactly how this will be implemented. It would seem that if it is an activity likely to be undertaken by the private sector it will be assumed that a distortion of competition will arise, irrespective of the empirical evidence.
It is clear from the judgment that if there is a real possibility of a private sector provider seeking to enter the market this is of relevance even if there is no evidence that it has actually happened, provided that the possibility is real and not wholly hypothetical. Therefore, it would seem that any supplies which are made by a local authority in the circumstances where there is a real possibility that a private sector provider may wish to enter the market may be caught. This raises an interesting question in respect of outsourcing of services by local authorities. For instance, would an outsourced service be subject to the same test notwithstanding the fact that it is not (apart from the outsourcing) undertaken by the private sector at all. It would seem that it would.
Finally, the European Court of Justice clarified how serious the distortion needs to be in order to prevent non-taxable status of local authorities in respect of particular services. The Court stated that only in circumstances where the distortion was no more than negligible could non-taxable status be achieved.
The case clearly indicates that it is likely to prove quite difficult for local authorities to avoid VAT on supplies made in competition to the private sector. Taxpayers may wish to consider whether their business is adversely effected by competition from local authorities if those local authorities are purporting to make non-taxable supplies.