[2009] UKFTT 323 (TC)

TC00266

Appeal Number: MAN/2008/1497 

FIRST TIER TRIBUNAL TAX

 VAT – EXEMPTION – Appellant made supplies of dismantling services to US Navy – whether the exemption under Article 151(1)(c) of the VAT Directive  applied only to visiting NATO forces stationed in the UK – no – was the Appellant’s services exempt – yes – Appeal allowed  

DECISION NOTICE 
Rule 35(2) The Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 

	ABLE UK LIMITED	Appellant

	- and -

         THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)

Sitting in public at Manchester on 30 October 2009

Nigel Gibbon of Omnis VAT & Customs Consultancy for the Appellant

Alan Bates counsel instructed by the Solicitor’s office of HM Revenue & Customs, for HMRC

© CROWN COPYRIGHT 2009

DECISION
The Appeal
1.	The Appellant was appealing against a HMRC ruling on 15 October 2008 and confirmed on 18 November 2008. 
2.	HMRC ruled that the Appellant’s supplies of ship decommissioning services to the United States Government’s Department of Transportation Maritime Administration (MARAD) were subject to United Kingdom  standard rated VAT. The Appellant argued that the supplies were exempt from VAT.
3.	The specific supply in dispute was the dismantling of ships within the United Kingdom. The ships had been formerly used in the service of the United States Navy. As part of the contractual arrangements the Appellant also made supplies to MARAD of services of towing the ships to the United Kingdom. The towing services were not part of the dispute. HMRC accepted that these services were exempt from VAT.
4.	The facts were agreed between the parties. The dispute was a narrow one which depended upon the correct construction of Article 151(1)(c) of the VAT Directive 2006/112/EC.  The Appellant contended that the exemption given by Article 151(1)(c) applied to supplies to NATO forces generally.  HMRC, on the other hand, submitted that the exemption was restricted to visiting NATO forces stationed in the United Kingdom.
The Legislation
5.	Article 151 of the VAT Directive provides as follows:
Chapter 8
Exemptions relating to certain Transactions treated as exports
Article 151
1. Member States shall exempt the following transactions:
(a) the supply of goods or services under diplomatic and
consular arrangements;
(b) the supply of goods or services to international bodies
recognised as such by the public authorities of the host
Member State, and to members of such bodies, within the
limits and under the conditions laid down by the
international conventions establishing the bodies or by
headquarters agreements;
(c) the supply of goods or services within a Member State
which is a party to the North Atlantic Treaty, intended
either for the armed forces of other States party to that
Treaty for the use of those forces, or of the civilian staff
accompanying them, or for supplying their messes or
canteens when such forces take part in the common
defence effort;
(d) the supply of goods or services to another Member State,
intended for the armed forces of any State which is a party
to the North Atlantic Treaty, other than the Member State
of destination itself, for the use of those forces, or of the
civilian staff accompanying them, or for supplying their
messes or canteens when such forces take part in the
common defence effort;
(e) the supply of goods or services to the armed forces of the
United Kingdom stationed in the island of Cyprus pursuant
to the Treaty of Establishment concerning the Republic of
Cyprus, dated 16 August 1960, which are for the use of
those forces, or of the civilian staff accompanying them, or
for supplying their messes or canteens.
Pending the adoption of common tax rules, the exemptions
provided for in the first subparagraph shall be subject to the
limitations laid down by the host Member State.
2. In cases where the goods are not dispatched or transported
out of the Member State in which the supply takes place, and in
the case of services, the exemption may be granted by means of a
refund of the VAT.
The Facts
6.	The Appellant carried on the business of construction, reclamation, and demolition. The Appellant was registered for VAT and operated from an address in Billingham.
7.	The Appellant secured a contract with MARAD to dismantle thirteen obsolete ships which were in the service of the United States Navy. The contract was in two parts. The ships had to be prepared and towed from the United States to the United Kingdom, and once secured in the Appellant’s facility the ships were to be dismantled.
8.	Environmental matters and health and safety issues were of critical importance and apart from other considerations, United States Government Inspectors were to have a presence on the site throughout the duration of the contract.
9.	Title to the obsolete ships did not pass to the Appellant, although it had received authorisation to sell the scrap as part of the Appellant’s consideration.
The Arguments
10.	 The disagreement between the parties centred on the construction of Article 151(1)(c). The dispute concerned whether the relief given by Article 151(1)(c) was restricted to visiting NATO armed forces stationed or operating outside their home State, and within an EU Member State. If Article 151(1)(c) was so restricted the Appellant’s supplies were standard rated for VAT purposes. If not so restricted, the Appellant’s supplies were exempt from VAT 
11.	The parties accepted that the Appellant’s supplies of dismantling services were made in the United Kingdom and that the United Kingdom and the United States were members of NATO. The parties further accepted that MARAD was part of the armed forces of the United States and that the dismantling services were intended for the use of MARAD.
12.	The Appellant contended that on a literal construction of Article 151(1)(c) its supplies clearly fell within the exemption provided by the Article. According to the Appellant, the Article comprised three separate exemptions. The words either and or used in the Article should be read disjunctively.   Article 151(1)(c) did not explicitly restrict its application to visiting forces stationed outside their home State in a Member State, unlike the wording of Article 151(1)(e)  which specifically stated that the exemption only applied to the supply of services to the armed forces of the United Kingdom stationed in the Island of Cyprus.  Thus, if the legislators intended to restrict Article 151(1)(c) to visiting NATO forces stationed in a Member State, they would have incorporated wording to that effect in the Article as they did for Article 151(1)(e).  
13.	The Appellant submitted that HMRC’s search for a purpose for the legislation was misguided. There was no reliable extrinsic evidence of the purpose, in which case the proper approach was to construe the exemption on the plain wording of Article 151(1)(c).
14.	Thus the Appellant’s supplies fell within the exemption provided by the first part of Article 151(1)(c), namely:
“the supply of …. services within the United Kingdom which is a party to the North Atlantic Treaty, intended …. for the armed forces of the United States party to that Treaty  for the use of those forces” (Tribunal’s italics). 
15.	HMRC argued that the purpose and scope of the exemption under Article 151(1)(c) was to provide relief in respect of supplies made to NATO visiting forces so as to ensure that the host country did not receive a fiscal advantage from the presence of those forces within its territory by taxing the expenditure of the visiting forces incurred as part of its visit. But the exemption did not extend to all expenditure incurred by or on behalf of a NATO force.
16.	HMRC accepted that the Travaux Preparatoires to the Sixth Directive (predecessor to the VAT Directive) was of no assistance in respect of the purpose of Article 151. Equally the Preamble and the Headings in the Directives were of no help. HMRC, however, asserted that the absence of direct evidence of the purpose should not detract from adopting a purposive construction of the legislation.
17.	HMRC submitted that the logical purpose for Article 151 was that its provisions should be compatible with the international obligations of those Member States which were members of NATO. In this respect HMRC produced a copy of the Official Text of the Agreement between the Parties to the North Atlantic Treaty regarding the Status of their Forces dated 19 June 1951 (hereinafter referred to as the Agreement).
18.	The purpose of the Agreement was to define the status of the forces of one party to NATO while in the territory of another. Article 1 of the Agreement dealt with definition of terms. Articles 1 a and 1b defined force and civil component:
a. 'force' means the personnel belonging to the land, sea or air armed services of one Contracting Party when in the territory of another Contracting Party in the North Atlantic Treaty area in connexion with their official duties, provided that the two Contracting Parties concerned may agree that certain individuals, units or formations shall not be regarded as constituting or included in a 'force' for the purpose of the present Agreement; 
b. 'civilian component' means the civilian personnel accompanying a force of a Contracting Party who are in the employ of an armed service of that Contracting Party, and who are not stateless persons, nor nationals of any State which is not a Party to the North Atlantic Treaty, nor nationals of, nor ordinarily resident in, the State in which the force is located. 
HMRC suggested that the wording in the definitions section of the Agreement was similar to that used in Article 151(1)(c)  regarding  forces and civilian staff.  Thus, it was reasonable to assume that the legislators for the Sixth Directive had this agreement in mind when drafting the provisions of the Directive.
19.	 HMRC relied on the provisions of Articles IX 2 and IX 8 of the Agreement as support for its proposition that the host country should not receive a fiscal advantage from the presence of the forces in the host Member State. Article IX 2 required visiting NATO forces to purchase subsistence goods through the authorities which purchase such goods for the receiving State’s armed services. The receiving State could also forbid or restrict the purchase of goods which would have an adverse effect on its economy.   Article IX 8 stated that no member of the visiting armed forces or an accompanying civilian would enjoy any exemption from taxes or duties relating to purchases and services chargeable under the fiscal regulations of the receiving State.
20.	HMRC also referred to Articles XI 4 and XI 12 of the Agreement which enabled a visiting force to import free of duty the equipment and reasonable quantities of provisions, supplies and other goods for its exclusive use. Article XI 12 defined duty as including customs duties and all other duties and taxes payable on importation or exportation. HMRC suggested that the relief granted in Article XI 4 formed the kernel of the exemption under Article 151(1)(c) in that VAT should not be charged on equipment supplies for the exclusive use of  visiting NATO forces. HMRC, conceded that scope of Article 151(1)(c) went beyond that envisaged under Article XI 4 of the Agreement.
21.	HMRC concluded from its analysis that the purpose of Article 151(1)(c) was to ensure that Member States adhered to its international obligations under NATO, and in particular the requirements of the Agreement.
22.	HMRC further contended that no policy reason had been identified by the Appellant for extending the exemption under Article 151(1)(c) beyond supplies to visiting NATO forces. 
23.	Finally HMRC submitted that the exemption for civilian staff under Article 15(1)(c)   should be construed in conjunction with the exemption for armed forces, in which case the qualification to civilian staff accompanying them provided the context for interpreting armed forces as visiting forces. The words accompanying them implied that the civilian staff were travelling with the armed forces.  Thus if the civilian staff were travelling, so were the armed forces. 
Consideration
24.	This would appear to be the first time that the scope of the exemption under Article 151(1)(c) of the VAT Directive has been considered by a Tribunal or a court. The Tribunal determines the dispute on the argument before it. The argument was restricted to one issue only, whether the Tribunal should construe armed forces in Article 151(1)(c) as visiting NATO armed forces stationed in the Member State. 
25.	The Tribunal accepts HMRC’s premise that where possible a purposive construction should be placed on Article 151(1)(c). Equally whatever purposive construction is placed on the Article, it should be derived from a firm evidential foundation. The parties acknowledged that the Travaux Preparatoires and the Preamble to the Sixth and the VAT Directive were of no assistance in this respect. In those circumstances the investigation of the purpose was confined to the wording of Article 151.  
26.	 The parties submitted that the heading to Chapter 8 “Exemptions relating to certain Transactions treated as exports” did not elucidate the purpose of Article 151. The Tribunal accepts their submissions. 
27.	Article 151 sets out five exemptions which involve supplies of goods or services under diplomatic or consular arrangements or to international bodies, NATO forces, and the United Kingdom armed forces stationed in Cyprus. The Tribunal considers that Article 151 has an international dimension which gives some credence to HMRC’s proposition that Article 151 was related to the obligations of Member States under international treaties.
28.	The Tribunal, however, holds reservations with the next stage of HMRC’s reasoning, namely, the purpose of Article 151(1)(c)  was restricted to the obligations of Member States to NATO visiting forces. The evidence adduced by HMRC in support of its reasoning was the Agreement dated 19 June 1951.  The Tribunal observes that this Agreement was just one, and probably a small part of the NATO Treaty. Further the terms of the Agreement by definition applied only to visiting NATO forces, and in effect was a self serving document. There was no evidence that the legislators of the Sixth and VAT Directive had this particular Agreement in mind when Article 151 was enacted. 
29.	In addition, the Tribunal was not persuaded that the specific articles of the Agreement relied upon by HMRC advanced its argument for the purpose of Article 151(1)(c), namely, the host country should not receive a fiscal advantage from the presence of the forces in the host Member State. HMRC conceded that the exemption under Article 151(1)(c) went beyond the tax treatment of visiting forces under the Agreement. Further Article IX 8 of the Agreement explicitly stated that members of visiting forces should not be exempt from taxes or duties of the host State. In short the Tribunal found the supposed connection between Article 151(1)(c) and the Agreement tenuous and without foundation.
30.	The other aspect of HMRC’s contention on purpose was that Member States should not receive a fiscal advantage from their NATO obligations. The Tribunal finds this aspect uncontroversial, which in effect was a statement about fiscal neutrality, one of the principles underpinning the common system of VAT. The Tribunal, therefore, considers that the most that can be said about the purpose of Article 151(1)(c) was that Member States should not receive a fiscal advantage from their membership of NATO.  Such a purpose was consistent with the Appellant’s wider construction of Article 151(1)(c). 
31.	HMRC argued that the Appellant should not benefit from a wide construction because there was no policy reason supporting it. Equally the Tribunal found on the evidence no policy reason for limiting the exemption under Article 151(1)(c) to visiting forces stationed in the Member State. The Tribunal agrees with the Appellant’s statement that evidence on the policy reasons for Article 151(1)(c) was not there in the public domain, and that a purposive analysis of the wording of Article 151 produced an indecisive outcome. In those circumstances the Appellant submitted that the Appeal turned on the ordinary and natural meaning of Article 151(1)(c).
32.	The Tribunal starts its analysis of the meaning of Article 151(1)(c) with the matters agreed between the parties:
(1)	The Appellant’s supplies of dismantling services were made in the United Kingdom.
(2)	The United Kingdom and the United States were members of NATO.
(3)	MARAD was part of the armed forces of the United States. 
(4)	The Appellant’s supplies were intended for the use of MARAD 
33.	  The sole issue in dispute was whether armed forces should be interpreted as visiting armed forces stationed in the Member State. The Tribunal considers that if the legislators intended Article 151(1)(c) to apply solely to visiting armed forces, the legislation would have said so expressly. The Tribunal gains support for its view from the wording of Article 151(1)(e) which was phrased in similar terms to Article 151(1)(c) except that it specifically restricted its application to the armed forces of the United Kingdom stationed in the Island of Cyprus.
34.	HMRC, however, argued that the absence of an express reference to visiting forces could be overcome by considering the clause in Article 151(1)(c) dealing with armed forces in conjunction with the next clause  of civilian staff accompanying them, from which it can be inferred that armed forces must mean visiting or stationed forces. The Tribunal finds HMRC’s argument flawed in two respects because
(1)	The inference of visiting forces did not as a matter of course flow from the phrase accompanying them. The OED defines accompanying as the action of being a companion, associating, going or acting with. Essentially accompanying means being with them. Travelling with them was not a natural consequence from the use of accompanying them 
(2)	HMRC’s analysis altered the structure of Article 151(1)(c) from three distinct exceptions to a hybrid structure comprising a merged exception and a separate exception. The effect of the hybrid structure was to corrupt a consistent use of or between the exceptions in the Article. Thus the or between those forces and of the civilian staff had a conjunctive meaning, whilst the or between accompanying them and for supplying their messes remained disjunctive. HMRC’s analysis would have carried greater force if all the relevant ors could be read conjunctively. 
35.	The Tribunal prefers the Appellant’s construction of Article 151(1)(c) consisting of three separate exceptions which was reinforced by the use of either as well as or in the Article.  Further the exception of the civilian staff accompanying them stood alone and did not constrain the ordinary meaning of armed forces in the previous exception.
36.	The Tribunal finds that the construction of armed forces in Article 151(1)(c) was not restricted to visiting NATO forces. Thus the Tribunal considers the Appellant’s analysis of Article 151(1)(c) correct, which was:
“the supply of …. services within the United Kingdom which is a party to the North Atlantic Treaty, intended …. for the armed forces of the United States party to that Treaty  for the use of those forces” (Tribunal’s italics). 
37.	Exemptions to VAT must be construed strictly but not restrictively to the extent of reading into an exception a meaning which was not apparent from the words and from any legislative purpose. The Tribunal, therefore, finds that the Appellant’s supplies of dismantling services fulfilled the requirements of Article 151(1)(c).
Decision
38.	The Tribunal decides that 	the Appellant’s supplies of dismantling services were exempt. The Appeal is allowed.
39.	The Appeal commenced before the 1 April 2009. The Tribunal directs in the interests of fairness and justice that the costs regime operating prior to the 1 April 2009 applies to this Appeal. The Tribunal orders HMRC to pay the reasonable costs of the Appellant incurred in this Appeal, and in the absence of an agreement either party may apply to a Tribunal Judge for determination of the costs. 

                        

                                 MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 24 November 2009

MAN/

Notes
1.	A party wishing to Appeal this decision to the Upper Tribunal must seek permission by making   an application in writing to the Tribunal within 56 days of being provided with full written reasons for the decision. An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.