TC09676 - [2025] UKFTT 01278 (TC)

Turning to the position under domestic law, given that, as I have said, the effect of ss 24-26 VATA is, in broad terms, to mirror the requirements of Article 168 PVD, there is, in principle, no conflict between EU law and domestic law. There is, however, still a question as to whether the domestic legislation can be interpreted in the same way as EU law.

The question under domestic law in accordance with s 24(1) VATA is whether the goods are used for the purposes of a business carried on by the taxable person. The effect of s 26 VATA is that the business must be a taxable business.

In accordance with the principles established by the CJEU in DSV and Weindel, the ability to deduct import VAT as input tax arises in two cases. The first is where the importer is the owner of the goods or has the goods at their disposal as owner. The second is where the cost or value of the goods imported is reflected in the price of relevant output transactions.

As the Tribunal mentioned in Piramal at [89] it is difficult to conceive of a situation where the cost or value of the goods imported is reflected in the price of the relevant output transactions in circumstances where the importer does not become the owner of the goods. It does however cover the situation (mentioned in HMRC’s manual VIT13300) where the importer only takes ownership of the goods at some later date and is not the owner of the goods when they are actually imported.

I note that, in Mr Holt’s skeleton argument, he gives two alternative reasons why the import VAT cannot be credited as input tax. The first is that TSI “did not use the goods in furtherance of a business”. The second is that TSI “never owned the goods … therefore cannot be regarded as having used them as a cost component in an onward taxable supply”.

On the face of it, this does leave the door open to the possibility that a taxable person who is not the owner of the goods could obtain an input tax deduction for import VAT if the goods are used in the furtherance of a business. However, it was clear from Mr Holt's oral submissions that HMRC’s case is essentially that, where goods are imported by somebody who is not the owner, the import VAT cannot be deducted as input tax.

Mr Sykes however submits that an interpretation of the domestic legislation which effectively requires the importer to be the owner of the goods is not permitted in accordance with the principles set out by the CJEU in Marleasing SA v La Comercial Internacional da Laimentación SA (Case C-106/89) (known as the Marleasing principle). In that case, the Court confirmed that, if there is a lacuna in domestic legislation which implements an EU directive or if there is a choice between different interpretations of the domestic legislation, it is appropriate for the domestic court to interpret the legislation in a way which is consistent with the relevant directive as long as the interpretation is not “contra legem”.

The expression “contra legem” was explained at [68] by the advocate general in Dansk Industry (DI) v Estate of Rasmussen (Case C-441/114) as follows:

“The Latin expression ‘contra legem’ literally means ‘against the law’. A contra legem interpretation must, to my mind, be understood as being an interpretation that contradicts the very wording of the national provision at issue. In other words, a national Court is confronted by the obstacle of contra legem interpretation when the clear, unequivocal wording of a provision of national law appears to be irreconcilable with the wording of a Directive.”

The scope of the Marleasing principle was summarised by the Court of Appeal in Ampleaward Limited v Revenue and Customs Commissioner [2021] STC 2260 at [83]. I will not repeat the summary here as it is not controversial. For the purposes of the present appeal, the main point is that, whilst the ability to interpret domestic legislation consistently with EU law is “broad and far-reaching”, the interpretation which is adopted should “go with the grain of the legislation” and “be compatible with the underlying thrust of the legislation being construed”.

This means that “an interpretation should not be adopted which is inconsistent with a fundamental or cardinal feature of the legislation since this would cross the boundary between interpretation and amendment” (see Vodafone 2 v Revenue and Customs Commissioners(No. 2) [2009] STC 1480 at [38(a)]). The Court should not therefore be interpreting the legislation in a way which requires it to make decisions which potentially have “important practical repercussions which the Court is not equipped to evaluate” (Vodafone at [38(b)]).

The implications of these restrictions were summarised by the Court of Appeal in Revenue and Customs Commissioners v IDT Card Services Ireland Limited [2006] EWCA Civ 29 at [90] as follows:

“In determining whether the solution is one of interpretation or impermissible law making, the relevant test remains whether the interpretation that would be required to make the statute in question convention compliant or in this case, EU law compliant, would involve a departure from a fundamental feature of the legislation. As I see it, the latter cannot be the case where the effect of the interpretation would be to bring the statute into conformity with the objectives of the Sixth Directive in the absence of clear statutory language to the effect that Parliament intended that there should not be such conformity.”

The submission made by Mr Sykes on behalf of TSI is that interpreting s 24 in a way which is consistent with the EU interpretation of article 168 PVD is impermissible because to do so would result in a clear conflict with the provisions of s 27 VATA.

The effect of s 27(1) is that, where goods are imported by a taxable person who is not the sole owner of the goods and the goods are to be used (wholly or partly) for private purposes, the import VAT is not input tax which can be deducted or credited under s 25 VATA. As Mr Sykes points out, this provision would be unnecessary if it is the case that import VAT incurred by a taxable person who is not the owner of the goods in question can never qualify as input tax.

Section 27(1) then goes on to provide for the possibility of the importer making a claim for the import VAT to be repaid. Section 27(2) requires HMRC to allow the claim if the effect of disallowing the claim would result in a double charge to VAT.

Mr Sykes makes the point that, if HMRC are right, this puts an importer of goods belonging to somebody else which are to be used for private purposes in a better position than somebody who imports goods which they do not own to be used for business purposes as, in the latter case, there is no possibility of any repayment of the import VAT.

There was some speculation at the hearing as to the meaning and effect of s 27 VATA. Mr Holt declined to provide any examples of the circumstances in which it might apply.

In VAT Notice 702 (which was withdrawn with effect from 1 January 2021) an example is given of a marine repair trader which imports a privately owned yacht for repair. However, the guidance only states that “if such treatment results in VAT being charged twice, you should apply to your local VAT office for a repayment.” The trader is advised to enclose a copy of the import VAT certificate and a copy of any sales invoice for the goods.

This might suggest HMRC had in mind a situation where VAT has been paid on the purchase of the yacht as well as import VAT being paid by the repairer. This example is repeated in De Voil (Issue 354 at V5-153). Again, however, the authors do not elaborate on the nature of the double charge to VAT which would justify a repayment.

Mr Sykes suggests that the double charge must be looked at from the point of view of the taxable person. So, if that person pays import VAT and then charges VAT on the repair services, he submits this would be a double charge to VAT which would justify a repayment claim. It is however difficult to see why this would be a double charge to VAT justifying a repayment given that the two VAT charges relate to separate goods/services. The import VAT is on the value of the yacht (in HMRC’s example), whereas the VAT on the invoice issued by the repairer relates to the repair services.

Mr Holt, on behalf of HMRC, also makes a point that, where everything is for wholly business purposes (and there is no element of private use), there is unlikely to be a double charge to VAT as, in principle, any VAT paid (other than the import VAT paid by the yacht repairer) is likely to be available as an input tax credit. This may well be right although no doubt it is possible to conceive of situations where this might not be the case.

Without more detailed argument on the point, I cannot reach a conclusion as to the precise scope of s 27 VATA. What the debate does however illustrate in my view is that there is no clear language in s 27 VATA which prevents s 24 VATA being interpreted in accordance with EU law principles.

The main purpose of s 27 VATA is to permit an input tax credit in certain circumstances where goods are to be used for private purposes. It is not surprising that the opening words confirm that, in the absence of the relevant conditions being satisfied, no input tax credit is available, even if those words are not strictly necessary. This is not a case where “the clear, unequivocal wording of a provision of national law appears to be irreconcilable with the wording of a Directive” (see the extract from Rasmussen at paragraph [117] above).

In any event, whilst I accept that s 27(1) carries an implication that there are circumstances in which somebody who imports goods which are not owned by that person may be able to deduct import VAT as input tax, the proposed interpretation of s 24 VATA is not limited (in accordance with EU law) to taxable persons who own the goods in question. One example I have already mentioned is a situation where the goods are not owned by the importer at the date the import takes place but where the importer subsequently becomes the owner of the goods and the value of the goods imported is therefore reflected in later output transactions of that person.

For completeness, I should mention Regulation 29 VATR which, as I have said, envisages the possibility of an input tax deduction for import VAT by a taxable person who is the importer, consignee or owner. Again, this suggests that there are circumstances in which somebody who is not the owner of goods which are imported is able to claim an input tax credit for the import VAT. However, the answer to this, as with s 27 VATA, is that the proposed interpretation of s 24 VATA based on EU law principles does not limit an input tax credit to someone who is the owner of the goods at the time they are imported.

In the light of all this, I do not consider that interpreting the UK domestic legislation in line with the EU principles I have identified results in any breach of the restrictions on the ambit of the Marleasing principle.

The final point relating to the domestic legislation put forward by Mr Sykes relates to the discussions in Parliament when inward processing relief was introduced into the UK in 1985 and the subsequent guidance provided by Customs and Excise. This was discussed by the Tribunal in Piramal at [102-105].

In summary, there is no doubt that, in 1985, both the Government and Customs and Excise were of the view that, where goods belonging to somebody else were imported for repair and the import VAT was paid by the repairer, the import VAT would be available as an input tax credit and that the purpose of inward processing relief was purely to deal with the cash flow issue which arose as a result of the repairer having to pay the import VAT and then to reclaim this when the next VAT return was submitted.

In the EU context, Mr Sykes notes that, until 1993, import VAT was payable when goods were imported from other member states, and that it was only in 1993 that inward processing relief was provided for in the relevant EU directive. He has demonstrated that throughout the whole of this period, the language of Article 168 PVD and ss 24-26 VATA (and their predecessors) has remained materially unchanged.

In the light of the clear understanding of the position in the UK in 1985, Mr Sykes submits that it would be fundamentally inconsistent with this understanding to interpret the domestic legislation in the way proposed by HMRC.

Whilst there is some force in this submission, it must be recognised that the interpretation of Article 168 PVD in this context has emerged more recently as a result of the guidance from the VAT Council in 2011, the decision in DSV in 2015 and the decision in Weindel in 2020. In circumstances where an interpretation of the domestic legislation in line with the EU interpretation is possible without infringing the restrictions on the Marleasing principle, this Tribunal is required to follow the EU approach irrespective of what it was thought the effect of the legislation may have been in 1985.