Hutchison 3G UK Ltd and Others v HM Revenue and Customs (Case C-369/04)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 August 2004 |
| Date | 24 August 2004 |
| Court | Value Added Tax & Duties Tribunal |
VAT Tribunal
The following cases were referred to in the decision:
Fazenda Pública v Câmara Municipal do Porto (Ministério Público, third party)VAT (Case C-446/98) [2001] BVC 493
Marleasing SA v La Comercial Internacional de Alimentación SA (Case C-106/89) [1990] ECR I-4135
"Eurocontrol") (Case C-364/92) [1994] ECR I-43
Taksatorringen v Skatteministeriet (Case C-8/01) (20 November 2003, unreported)
Liability - Mobile communications licences - Whether activity of the Secretary of State in awarding licences classified as "economic activity" or exercise of the sovereign authority of the State - Directive 77/388, the sixth VAT directive, art. 4(1), (2) and (5); Value Added Tax Act 1994, s. 41(1) and (2).
The issue was whether the auction of Third Generation Mobile Communications Licences was an economic activity carried on by the Secretary of State for Trade and Industry (the Secretary of State) so that the appellants were entitled to deduction of input tax totalling £3,347,698,000 included in the payments made.
The third generation of mobile telephones and devices represent an important technological development in the mobile telecommunications market. It offers a far greater capacity for the fast transfer of data than ever before and provides a system capable of supporting innovative multimedia services combining the use of terrestrial and satellite components. The Department for Trade and Industry decided, following consultation, that the licences required to establish and use third generation networks would be awarded to operators by auction. To this end, in November 1999, regulations were made setting out a framework for the grant of five licences. These were known as the Wireless Telegraphy (Third Generation Licences) Regulations 1999. The auction was held and raised revenue of approximately £22.5 billion, massively greater than the initial estimate by the Radiocommunications Agency of £1.5 billion. Each of the appellants was successful in obtaining licences and in 1993 they claimed input tax in relation to the amounts paid. The claims were made on the basis that the award of licences by the Secretary of State was a taxable supply made by a taxable person. The commissioners rejected the claims on the grounds that the award of licences was not an economic activity, but an activity concerned essentially with the regulation of the individual citizen or commercial enterprise.
The principal arguments for the appellants in relation to art. 4(1) and (2) of the sixth directive were threefold. First, they submitted that the question of whether an activity is an "economic activity" within the meaning of art. 4(1) and (2) is determined by reference to the inherent nature of the activity. The purpose and objectives of the Secretary of State were irrelevant or, if they were relevant, so was the purpose of the appellants. Second, the appellant submitted that the auction was an economic activity for a number of reasons, particularly because of: the nature of the licences, amounting to the sale to businesses of the right to use a resource for business purposes; the financial consideration, being revenue available to be used by the British Government for general purposes unconnected with the telecommunications market; the manner in which the licences were configured and granted and in which the financial consideration was determined. The third principal argument of the appellants was that art. 4(1) and (2) did not exclude regulatory activities per se from the concept of "economic activity". The appellants contended that if the activities of the Secretary of State were partly economic activities and partly not, then the whole, or substantially the whole, consideration fell to be treated as the taxable amount. The commissioners argued that the activity of the Secretary of State in awarding the licences could not be classified as an economic activity under art. 4(1) and (2), but rather constituted an exercise of sovereign authority of the state.
Article 4(5) of the sixth directive sets out a limited exception to the basic provision in art. 4(1). This applies, subject to two limitations in the sub-paragraphs of art. 4(5), to activities in which states, regional and local government and other bodies governed by public law engage as public authorities. The appellants submitted that the Secretary of State could not have been acting as a public authority since, in awarding the contracts, he was acting under the same legal conditions as those applicable to private traders. Even if the Secretary of State was held to have been acting partly as a public authority, none of the consideration for the grant of the licences, or alternatively only the part equal to the administrative costs incurred in granting the licences, should be treated as relating to the activity of the Secretary of State as a public authority. In the opinion of the appellants, the Secretary of State acted under a statutory framework that was entirely or substantially permissive and imposed no conditions or obligations upon him that would differentiate the legal conditions under which he acted from those applying to private traders. The commissioners maintained that the Secretary of State was acting as a public authority as his activities were governed by public law and under a special legal regime that did not apply to private operators.
The appellants further contended that the limitation in the second sub-paragraph of art. 4(5) based on "distortion of competition" applied in this case to make the Secretary of State a taxable person. The risk of distortion arose from, inter alia, the proposed introduction of secondary trading alongside the continuing primary assignments of the licences; the later grant of rights in relation to the use of the third generation equipment would be subject to VAT whereas, if the commissioners were correct, the initial supply of rights by the Secretary of State would not be. Finally, the third sub-paragraph of art. 4(5) provides for states, governments and other public bodies to be considered taxable persons in relation to the activities in Annex D to the sixth directive. The appellants submitted that the heading "telecommunications" in the Annex covered the activities of the Secretary of State in auctioning the licences. The commissioners argued that the term "telecommunications" did not apply in this case. The definition in art. 9(2)(e) of the sixth directive was intended to cover supplies of rights to use telecommunications infrastructure and equipment and not the grant of rights to use part of the spectrum for telecommunications purposes.
A separate issue of UK law was also considered relevant to this appeal. The appellants contended that s. 41(1) of the Value Added Tax Act 1994 and Treasury Taxing Directions issued in 2000 appeared to implement art. 4(5) of the sixth directive in UK law. Therefore, the commissioners were unable to rely on art. 4(5) to override the clear, unambiguous and deliberately broad language of s. 41(2) and the Directions which served to treat the activities of the Secretary of State in awarding the licences as a supply in the course or furtherance of business. The commissioners argued that the relevant national provisions produced the result that the activities of the Secretary of State were non-taxable.
Held, that in order to enable the tribunal to decide the appeals, it was necessary to resolve various questions concerning the interpretation of European Community law. The following questions were referred to the Court of Justice of the European Communities for a preliminary ruling:
1. In the circumstances set out in the Agreed Statement of Facts, is the term "economic activity" for the purposes of art. 4(1) and (2) of the sixth directive to be interpreted as including the issuing of the licences by the Secretary of State by way of an auction of rights to use telecommunications equipment in defined parts of the electro-magnetic spectrum (the Activity), and what considerations are relevant to that question?
2. In the circumstances set out in the Agreed Statement of Facts, what considerations are relevant to whether the Secretary of State, in conducting the Activity, was acting as a "public authority" within the meaning of art. 4(5) of the sixth directive?
3. In the circumstances set out in the Agreed Statement of Facts, can the Activity be (i) in part an economic activity and in part not, and/or (ii) partly carried out by a body governed by public law acting as a public authority and partly not, with the result that the activity would be partly chargeable to VAT under the sixth directive and partly not?
4. How likely and how close in time to the carrying out of an activity such as the activity does a "significant distortion of competition" within the meaning of the second sub-paragraph of art. 4(5) of the sixth directive have to be in order for the person carrying out that activity to be required by that sub-paragraph to be considered a taxable person in respect of that activity? To what extent, if any, does the principle of fiscal neutrality bear on that question?
5. Does the word "telecommunications" in Annex D to the sixth directive (which is referred to in the third sub-paragraph of art. 4(5) of the sixth directive) include the issuing of the licenses by the Secretary of State by way of an auction of rights to use telecommunications equipment in defined parts of the electro-magnetic spectrum, in the circumstances set out in the Agreed Statement of Facts?
6. Where (i) a member state chooses to implement art. 4(1) and (5) of the sixth directive by legislation conferring on a government department (such as, in this case, the UK Treasury) a statutory power to make directions specifying which goods or services supplied by government departments are to be treated as taxable supplies...
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