Case No: CO/4182/99
 
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 8 November 2001

B e f o r e :

THE HONOURABLE MR JUSTICE LLOYD
- - - - - - - - - - - - - - - - - - - - -

BETWEEN
	COMMISSIONERS OF CUSTOMS & EXCISE	Appellants	
	- and -		
	(1) EASTWOOD CARE HOMES (ILKESTON) LIMITED
(2) EASTWOOD CARE HOMES (MANSFIELD) LIMITED
(3) EASTWOOD CARE HOMES (NOTTINGHAM) LIMITED
(4) EASTWOOD CARE HOMES (BURTON) LIMITED
(5) EASTWOOD CARE HOMES (WALSALL) LIMITED	Respondents	

- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -

Philip Sales (instructed by Solicitor, HM Customs & Excise for the Appellant)
The Respondents were not represented

- - - - - - - - - - - - - - - - - - - - -

Hearing date: 31 October 2001

JUDGMENT

I direct that no official shorthand note shall be taken of this judgment and 
that copies of this version as handed down may be treated as authentic.
 
Mr Justice  Lloyd: 

1.	This is an appeal by the Commissioners of Customs and Excise against a decision by the VAT and Duties Tribunal made on 25 August 1999 in favour of the five respondent companies.  The Commissioners had cancelled the registration of the companies for VAT purposes, in circumstances which I will describe.  The Tribunal held that this cancellation was not justified, for reasons which they explained, finding that article 24.6 of the Sixth EEC Directive on VAT had overriding effect.  Both parties were represented before the Tribunal, but the Respondents chose not to take part in the appeal, relying on the judgment of the Tribunal.  I am grateful for the submissions of Mr Sales for the Commissioners who has put the matter succinctly but fully and fairly to me.  I have come to the clear conclusion that the Tribunal were wrong in deciding that the Directive had overriding effect in the way they thought, and that the Commissioners’ appeal should be allowed, for the reasons which I set out in this judgment.  Although only one party was represented, this judgment is one which may be cited, notwithstanding the Practice Direction (Citation of Authorities) [2001] 1 W.L.R. 1001, because, by reversing the Tribunal’s decision, it establishes a new principle.
2.	Each of the Respondents runs a residential care home.  All are subsidiaries of a company called Eastwood Care Homes plc.  Because of the nature of the business of the subsidiaries, almost all of their supplies of goods or services are exempt under the VAT legislation, but they do make some standard-rated supplies.  The amount of the latter, however, is so small in each case that they are under the threshold of turnover at which registration for VAT is compulsory.  Until 1995, the position as regards VAT registration was that the parent company was registered, but none of the subsidiaries was.  That was entirely consistent with the legislation, because of the low level of non-exempt turnover by the subsidiaries.  Their not being registered had the consequence that they could not recover any of the input tax which they bore on taxable supplies to them.
3.	The Respondents could have applied for voluntary registration at any time between 1992 and 1995, and the application would have been allowed.  The effect of their being registered, given that most of their supplies were exempt, would have been as described by the Tribunal in a passage with which Mr Sales took no exception, as follows:
“11.	A person whose input tax is wholly attributable to exempt supplies made or to be made by him cannot take credit for that input tax.  If he also makes taxable supplies, such part of his input tax as is attributable to his taxable supplies is allowable for credit.  In addition there is a provision, commonly called the “de minimis provision” by virtue of which, if the input tax attributable to his exempt supplies (his exempt input tax) does not exceed a specified amount, all of his exempt input tax is treated as attributable to his taxable supplies and is thus allowable for credit.  Until 1 April 1992 the amount was a sum which was less than (a) a specified sum per month on average or (b) both a different monthly average sum and a specified percentage of all of the person’s input tax.  With effect from 1 April 1992 (b) was in effect removed, so that in order to qualify for full credit it was only necessary that the monthly average of a person’s exempt input tax should not exceed a specified amount.  This allowed persons who made both taxable and exempt supplies to claim credit for substantially more of their exempt input tax than previously.  This provision was replaced with effect from various dates in 1995 (depending on the date of the beginning of a person’s tax year) by a new version of the former double condition.”
4.	However, as I say, the Respondents did not, at the time, seek to take advantage of the alleviation of the position as from 1 April 1992.  Instead they remained outside the scope of VAT registration, as they were entitled to do.  Their position changed, however, as of 1 August 1995.  In late July 1995 an application was made for a group registration covering the parent company and the five Respondents.  This was allowed, with effect from 1 August 1995, the parent being the representative member.  I will refer later to the effect of this under the Value Added Tax Act 1994 (“the VAT Act”).
5.	A year later, however, the group having changed its accountants, it sought to take a different position.  Each of the Respondents applied for individual registration, and for this to take effect from 1 April 1992, expressly in order to take advantage of the more generous de minimis regime that had applied between 1992 and 1995.  In terms the application was for the registration to have continuing effect, with the first VAT return to be allocated to the period ending on 31 August 1996.  No reference was made in the applications or the covering letters to the current group registration, though the registration number of the parent company was stated in answer to the question “are there any other VAT registrations you are or have been involved in in the last 24 months?”  Despite this reference the new accountants appear to have been unaware of the group registration.  At the beginning of August 1996 these applications were approved, with the retrospective effect requested.  Soon after that, however, the Customs and Excise realised that the group registration existed, and accordingly cancelled the individual registrations, and notified the parties accordingly.  (In relation to one of the Respondents, it may be that the registration had not been effected by then, but nothing turns on that difference.)  The Respondents asked for a reconsideration of the decision.  In doing so, having realised the existence of the group registration, and not having taken steps to alter that, they asked for registration only from 1 April 1992 to 31 July 1995.  In due course the Customs and Excise responded, holding to their decision. This was handled by two different offices, who expressed themselves in slightly different terms, but nothing turns on that.  It is against the decision to cancel registration that the Respondents appealed to the Tribunal, again seeking purely retrospective registration.  Another irrelevant point is the fact that (at least for some of the Respondents) the application was acceded to and then the registration cancelled.  The question is whether the Respondents were entitled to be registered with retrospective effect, in the circumstances that then existed.
6.	A number of different arguments were laid out before the Tribunal.  I have seen the respective skeleton arguments that were prepared and exchanged at that stage.  They turned partly on the terms of the VAT Act, and partly also on the Sixth VAT Directive.  The Tribunal’s decision was made purely on the Directive.  It is right, however, that I should first address the position under the national legislation.
The relevant national legislation
7.	Under section 3(1) of the VAT Act, a person is a taxable person for the purposes of the Act if he is, or is required to be, registered under the Act.  Schedule 1 deals with registration, so far as is material.  Registration is compulsory for persons who make taxable supplies if the amount of their taxable supplies exceeds a given amount over a given period.  Supplies which are exempt under section 31 and Schedule 9 are not taxable supplies.  The sort of supplies made by the Respondents in respect of their residential care homes would for the most part be exempt as within Group 7 in Schedule 9.  Voluntary registration is governed by paragraph 9 of Schedule 1, in the following terms:
“9.	Where a person who is not liable to be registered under this Act and is not already so registered satisfies the Commissioners that he
	(a)	makes taxable supplies; or
	(b)	is carrying on a business and intends to make taxable supplies in the course or furtherance of that business
	they shall if he so requests register him with effect from the day on which the request is made or from such earlier date as may be agreed between them and him”
8.	Thus, a person who satisfies the requirements of that paragraph is entitled to voluntary registration as from the date of the request, and may be given it from an earlier date.  The Commissioners have a discretion to agree an earlier date.  As I understand it, they do not generally refuse to agree to retrospective operation if requested.  
9.	In the present case the Customs and Excise argue that the Respondents were not within that paragraph and were therefore not entitled to apply under it.  Mr Sales submits that this is because the Respondents were already registered by virtue of the group registration.  In the skeleton argument put before the Tribunal, there was also an alternative argument, based on the terms of section 43 of VAT Act which deals with group registration.  I will mention this after referring to the section.
10.	Section 43 contains extensive provisions dealing with group registration.  There is no doubt that the Respondents and their parent fell within these provisions, or as to the procedure adopted.  I can therefore limit my reference to subsection (1), and indeed to only some parts of it, which deal with the effects of group registration.
“43(1)	Where under the following provisions of this section any bodies corporate are treated as members of a group, any business carried on by a member of the group shall be treated as carried on by the representative member, and
	(a)	any supply of goods or services by a member of the group to another member of the group shall be disregarded; and 
	(b)	any other supply of goods or services by or to a member of the group shall be treated as a supply to or by the representative member ….”
11.	When a group registration is allowed, the representative member is given (if it does not already have) a VAT registration number.  The other members of the group do not have their own registration numbers, but they have distinguishing numbers as a sort of suffix to the representative’s number.  Mr Sales submitted that each member of the group is registered for VAT and that therefore the Respondents could not, in the terms of Schedule 1 paragraph 9, show that they were “not already registered” under the Act.  That is one argument that was put before the Tribunal.  They seem to have had some doubt about it: see paragraph 24(2).  An alternative argument put relied on section 43(1)(b).  According to this, while the group registration subsists any supplies actually made by one of the Respondents are to be treated as made by the parent.  Accordingly a Respondent could not assert, for the purposes of Schedule 1 paragraph 9, that it made taxable supplies, because all the supplies it made were deemed to be made by the parent.  The Tribunal did not comment on this argument, nor did it decide the position expressly under paragraph 9.  Mr Sales invited me to decide it, and to do so on the basis that all members of the group are registered.  It seems to me that he is right that the Respondents’ applications did not fall within Schedule 1 paragraph 9, but I do not propose to decide whether this is on one or other or both grounds.  I see the force of them, and it may be that both are correct.  Given that it does not matter for this case which is right, I will not decide more than I need to.  It is also clear that, under paragraph 9, the Commissioners have a discretion as to retrospective registration.  Though they usually allow it, they cannot be compelled to do so.  The present case is unusual in that the Respondents want registration which is only retrospective.  I am inclined to the view (but do not need to decide) that the paragraph does not permit this, and that any retrospective element must go with at least some prospective operation of the registration.  Even if that is not right, what is clear is that retrospectivity of registration under paragraph 9 is a matter of discretion, that the Commissioners cannot be compelled to allow it, and that, in terms of the VAT Act, the Respondent cannot contend that a refusal to allow retrospective registration, once the facts were known, was unlawful.
12.	Although the Tribunal did not expressly decide what the position was under the national legislation, Mr Sales submitted that they must have proceeded on the basis that the national legislation did not justify the Respondents’ applications, since they went straight to the Directive.  This comment seems to me to be well founded.  At all events, having considered the points made in the skeleton arguments put before the Tribunal and those that appear from the Tribunal’s decision, and the additional points about retrospective operation mentioned above, I am satisfied that, if it were only a question of the VAT Act, the Respondents could not succeed.
13.	I note that, in theory, if the Respondents had taken the necessary steps to bring to an end the group registration, or to take themselves out of it, they would not then have been registered, and could then have applied under Schedule 1 paragraph 9.  But if they had done so, it seems to me that it would have been entirely rational for the Commissioners to decline to register the Respondents retrospectively, since to do so would have had the effect that, for the period during which the group registration arrangement subsisted, they would have been subject to the normal VAT regime simultaneously in two inconsistent ways: one by way of individual registration and the other through a group registration.
The European Directive
14.	The relevant provision is article 24 of the Sixth VAT Directive, 77/388/EEC, which forms part of Title XIV headed Special Schemes.  Other articles in this title provide for special schemes or regimes of taxation for particular kinds of business, some of which (e.g. for travel agents and tour operators) are compulsory.  Article 24 deals with small undertakings, and gives member states the discretion to make one or more special schemes for the application of VAT to small undertakings.  I will first set out such parts of the article as I need to for the understanding of the point.
“1.	Member States which might encounter difficulties in applying the normal tax scheme to small undertakings by reason of their activities or structure shall have the option, under such conditions and within such limits as they may set … of applying simplified procedures such as flat-rate schemes for charging and collecting the tax provided that they do not lead to a reduction thereof.
	2.	Until a date to be fixed …
	(a)	Member States which have made use of the option under article 14 [of the Second Directive] to introduce exemptions or graduated tax relief may retain them and the arrangements for applying them ……
	3.	The concepts of exemption and graduated tax relief shall apply to the supply of goods and services by small undertakings.  Member States may exclude certain transactions from the arrangements provided for in paragraph 2 …
	5.	Taxable persons exempt from tax shall not be entitled to deduct tax in accordance with the provisions of article 17, nor to show the tax on their invoices or on any other document serving as invoices.
	6.	Taxable persons eligible for exemption from tax may opt either for the normal value added tax scheme or for the simplified procedures referred to in paragraph 1.  In this case they shall be entitled to any graduated tax relief which may be laid down by national legislation.
	9.	The Council will decide at the first appropriate time [whether to introduce a common special scheme for small undertakings]  Until the introduction of such a scheme Member States may retain their own special scheme which they will apply in accordance with the provisions of this article ……. ”
15.	In fact the UK has not taken advantage of the option given by paragraph 1 to introduce flat-rate schemes or the like for small undertakings.  What it has done is to take advantage of paragraph 2, with a threshold level of turnover by way of taxable supplies, below which registration is not compulsory.  However, in compliance with paragraph 6, the legislation includes an option for someone who is (in terms of the Directive) a taxable person eligible for exemption from tax, to choose between exempt status, thereby remaining non-registered, under the paragraph 2 scheme, and the normal tax scheme, in which case they must be registered.  That is the option provided by Schedule 1 paragraph 9 of the VAT Act. 
16.	The Tribunal’s decision in favour of the Respondents was on the basis that article 24.6 confers on each Respondent a right, notwithstanding the limitations of the national legislation, to exercise the right, in July 1996, to opt for the normal tax scheme to apply to them in respect of the period from 1 April 1992 to 31 July 1995.  Their reasoning is expressed as follows:
“26.	Thus under the Sixth Directive a person who is eligible for exemption can opt to be subject to VAT and he will then be entitled to deduct input tax in accordance with the rules for deduction as they apply in his country.  It is common ground that, if the group treatment had not existed, the Appellants’ applications for retrospective registration would have been accepted without demur.  That would have accorded with their rights under the Sixth Directive, because under this country’s system it is necessary to be registered before credit for input tax can be obtained.  But it is said that the inclusion of the Appellants in the group deprived them of those rights or operated to bar them from exercising those rights. In our judgment by virtue of the Sixth Directive each of the Appellants was entitled to exercise those rights in respect of the period beginning on the appropriate date and ending on 31 July 1995.  In our judgment, insofar as Schedule 1 to the 1994 Act purported not to grant those rights, or to bar them, or to confer on the Commissioners a discretion to refuse them, it is contrary to and cannot stand with the express provisions of the Sixth Directive.”
17.	I do not know exactly how the case was put before the Tribunal, but nothing in the skeleton arguments foreshadows an argument by the companies that, if Schedule 1 paragraph 9 did not permit their application to be granted, it failed to give proper effect to the Sixth Directive, and must give way to the provisions of the Directive, which would therefore have direct effect to that extent.  I cannot help feeling that if the Tribunal had had the benefit of the arguments which have been put before me, they would not have come to the conclusion they did reach.
18.	Article 24 is concerned to provide for and prescribe the freedom of member states to make special schemes, differing from the normal VAT regime, in the case of small undertakings.  The VAT legislation is a central feature of Community legislation, and vital to the financing of the operations of the Commission and other Community institutions.  It is therefore not surprising that, except where there are express exceptions, member states have to apply VAT legislation consistently, though they do have freedoms, for example as regards rates of tax.  Article 24 enables Member States to make special schemes under paragraph 1, if they wish, and to retain or make schemes under paragraph 2 whereby undertakings with low taxable turnover may be exempt from the normal regime.  The article limits the freedom of member states in certain respects, though the details of any scheme are for each state to decide on, within the scope allowed.  One limit, and the only one relevant, is that in paragraph 6, whereby a small undertaking which is eligible may choose between a paragraph 1 scheme, if there is one which could apply to it, or exempt status under paragraph 2, or the normal VAT legislation, in the latter case gaining the advantage of being able to claim credit for input tax.  Such freedom of choice, as between exempt and registered status, is allowed by the VAT Act in Schedule 9 paragraph 1.  But it is only allowed subject to the terms of that paragraph.  Just as the application of any paragraph 1 scheme (if one existed) would be subject to such conditions and limits as the relevant member state may set, it does not seem to me that the ability to opt between exempt and registered status need be unconditional, so long as any conditions imposed do not render ineffective or illusory the ability to choose which is required by the Directive.
19.	In what respects, then, might it be argued that the choice allowed by Schedule 1 paragraph 9 does not go far enough to satisfy the Directive?  According to the paragraph, the person choosing must be (a) not subject to compulsory registration, (b) not already registered, and (c) (so far as presently relevant) making taxable supplies.  If so, he is entitled to request registration, and on making such a request he is entitled to be registered as from the date of the request.  All of those requirements and provisions are entirely rational and reasonable.  He may, if the Commissioners agree, be registered from a prior date.  The Tribunal commented (correctly, as a matter of fact) that if the group registration had not been effected, and no other registration had either, the Respondents would have been granted retrospective registration without more.  However, it is clear from paragraph 9 that this is not a matter of obligation for the Commissioners: their only obligation is to register prospectively.
20.	Thus, the Respondents have to show that paragraph 9 does not properly give effect to the Directive in two respects: first, the imposition of pre-conditions which they cannot satisfy while they are within the scope of a group registration, and secondly the feature that registration of right (if it applies at all) is limited to prospective registration, leaving any retrospective operation as a matter of discretion for the Commissioners.  
21.	As for the first point, I cannot see what divergence there could be said to be between the policy of Schedule 1 paragraph 9 and that of article 24.6.  The article requires that relevant persons be free to choose between exempt status and normal registered status.  By applying for group registration, the Respondents did make that choice, and opted for the application of the normal regime.  I see no reason at all why any Respondent should be regarded as entitled to make a different choice thereafter, except for the future.  When the existence of the group registration was realised, the Respondents did not seek to remove themselves from it or to change it in any way.  They only wanted to alter the position for the past.  Unless that is something which the Directive requires, it must be a proper requirement to exclude from voluntary registration a person who is already registered.  There would be no point in allowing voluntary registration in such a case.
22.	Turning therefore to the second point, whether the Directive requires that national legislation allow a retrospective choice, not just a prospective choice, it would seem rather surprising that this should be so.  Generally speaking, Community law respects the principle of legal certainty, with which retrospective alteration of a legal position is generally to be seen as incompatible.  As regards the terms of article 24.6 itself, I see nothing in it to suggest that what is required is anything other than a prospective effect of the choice to be made.  The wording itself, “may opt … for the normal value added tax scheme” conveys to me the sense of a prospective choice.  Nor is there anything that I can discern from the general object and purpose of article 24 as a whole, in the context of the Directive, which suggests that it was envisaging anything other than a prospective choice, as a matter of entitlement.
23.	The two points identified in paragraph 20 and discussed briefly in the last two paragraphs are of course bound together.  No-one would seek to argue that a taxable person (in terms of the Directive) who is not subject to compulsory registration, cannot choose in favour of one status at one time and later of another for the future, subject no doubt to provisions required in terms of administrative efficiency and the protection of the revenue.  But that is not what these Respondents seek to do.  While the provisions of which they now seek to take advantage were in force, they opted (by inertia) for exempt status.  Then in 1995 they opted in favour of the normal regime, but only with prospective effect and through a group scheme.  Later they realised that a different treatment would have been to their advantage between 1992 and 1995, so they sought to alter their treatment but only for that period.  I find it very striking that the choice they seek to make is not prospective, but purely retrospective.  In my judgment that is not a choice which article 24.6 envisages at all, and certainly not one which the article requires member states to afford to persons in the position in which the Respondents were in July 1996.
24.	More generally, the Tribunal’s reasoning assumes that article 24.6 has direct effect so as to prescribe the choices which member states must allow.  It seems to me that this is not correct, and that the conclusion may have been reached without having had cited to them some of the relevant authorities.  A basic principle, in order that a provision of a Directive can be found to be of direct effect, is that it must be “unconditional and sufficiently precise”, sufficiently, that is to say, to be able to be “relied upon as against any national provision which is incompatible with the Directive or insofar as the provisions of the Directive define rights which individuals are able to assert against the State”: see, for example, Francovich v. Italy Cases C-6/90 and C-9/90 [1991] ECJ I-5357 at paragraph 11 (page 5408).  In my judgment Mr Sales is justified in submitting that article 24 gives member states a good deal of freedom of choice as regards the particular schemes which they choose to establish in relation to small undertakings, and the terms and conditions upon which they will apply.  It is true that, relevantly, there must be a freedom for the taxable person to choose between exempt status under paragraph 2, any special scheme under paragraph 1, and the normal regime for value added tax.  If, theoretically, a member state had created schemes under paragraphs 1 and 2 but had not provided an option as required by paragraph 6, it may be that the Directive would be found to have sufficiently clear and precise effect so that an undertaking to which, in principle, the choice should have been available under paragraph 6 was able to exercise that choice, for the future, despite the omission from the domestic legislation.  That would be a clear right defined by the provisions of the Directive which individuals were to be able to assert against the State.  But I do not see how paragraph 6 can be read as extending so far as to define in any further detail the choices which are required to be open to relevant undertakings.  I therefore regard paragraph 6, in the present context, as not capable of direct effect, because it is not unconditional or sufficiently precise to have direct effect, given the existence of a real choice under the national legislation.  Indeed, so far from that, it seems to me clear that it is not intended, in this context, to have direct effect.
25.	Accordingly, both as a matter of the interpretation of paragraph 6 in its own terms, and because it is not, in these circumstances, of direct effect, I come to the opposite conclusion from that of the Tribunal.  It seems to me that the requirements of the Directive set out in paragraph 6 have been fully and properly transposed into national legislation by the provision in Schedule 1 paragraph 9, and that they do not allow an application for voluntary registration at a time when the applicant is already part of a group registration, and that even if they did, they do not compel the Commissioners to grant retrospective registration, which is a matter of discretion, not of entitlement.
26.	I have considered whether, given the difference between my own view and that of the Tribunal, I ought to regard the point as being appropriate or necessary to be referred to the European Court of Justice for a preliminary ruling.  Since, so far as appears to me, the Tribunal did not have full argument on the point, it not having been mentioned at all in the skeleton arguments before them, I am not prepared to regard their different view as casting doubt on the reading of article 24.6 which seems to me plain.  In my judgment it is acte clair that the article has the meaning and effect which I have indicated, and not that preferred by the Tribunal.  Therefore I do not think it necessary or appropriate to refer the question to the European Court of Justice before coming to my own conclusion on the appeal.
27.	Accordingly, in my judgment the Commissioners were correct in their decision that the Respondents’ request in July 1996 was invalid, and I will allow the appeal.  Mr Sales said that the Commissioners would not in any event ask for costs against the Respondents, and therefore the order will do no more than state that the Commissioners’ appeal is allowed, and that the Tribunal’s order be discharged insofar as it directed that the Respondents be restored to the position they would have been in if the registrations had not been cancelled or, in the case of the Walsall company, had not been refused.