ECJ VAT Ruling May Hike Cost Of Local Authority Services

by Robert Lee, Tax-News.com, London

17 September 2008

The European Court of Justice (ECJ) on Tuesday provided clear guidance on how significant distortions of competition are to be assessed, in what one tax advisor says is the most comprehensive VAT case to date to deal with competition between public and private bodies.

Dealing with a request for a ruling referred by the UK High Court in June last year, the ECJ has determined that competition must be evaluated by reference to the activity in question and without any evaluation of a particular local market. In addition the ECJ ruled that the term “significant” meant something which must be more than just negligible.

Although the activities based approach was the one which was being pressed for by HMRC, the decision will have a profound effect on HMRC’s current treatment of public bodies, according to BDO Stoy Hayward LLP.

Commenting on the decision, Marc Welby, VAT partner at BDO Stoy Hayward said: “Although the specific activity being considered by the ECJ was off-street car parking, today’s (Tuesday's) decision is of far wider import and could significantly impact on the VAT treatment of many other services provided by local councils. This ruling could open the door for private traders to claim that treating local councils’ activities as 'non-business' for VAT purposes is distorting and puts the Councils in a more favourable VAT position.”

He added: “If such claims are proved founded local councils could soon find themselves with increased VAT costs, particularly in relation to their housing and welfare activities. HMRC may well regret taking this case to the ECJ – it could prove to be a shot in the foot.”

In the context of the provision of off-street car parking itself, BDO notes that the decision still places the onus on HMRC to prove that there would be significant distortions of competition, albeit on an activities basis, for a local authority to be denied its non taxable status for off-street car parking.

Linda Leach, Director of VAT at BDO Stoy Hayward and the case handler for the Isle of Wight case said: “It is now for the High Court to conclude this part of the litigation and we must wait for that decision to be certain of the outcome at this stage. In the meantime, local authorities should continue to make voluntary disclosures for overpaid VAT on income from off-street car parking as HMRC still have much to prove.”

Marc Welby added: “The decision of the ECJ may have reduced slightly the hurdle but it is still a hurdle which HMRC must overcome, if they are to succeed in arguing that not charging VAT will significantly distort competition. The reality is that most local authorities already charge less than private operators.”

Recommended