Isle Of Wight Council v Revenue and Customs [2006] UKVAT V19427 (23 January 2006)

19427
LOCAL AUTHORITIES – Off-street parking – Taxable person – Whether treatment as non-taxable person in relation to off-street parking activities would result in significant distortions of competition – No – Sixth VAT Directive (77/388/EEC) Act 4.5

LONDON TRIBUNAL CENTRE

ISLE OF WIGHT COUNCIL
MID-SUFFOLK DISTRICT COUNCIL
SOUTH TYNESIDE METROPOLITAN BOROUGH COUNCIL
	WEST BERKSHIRE COUNCIL	           Appellants

-	and –

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents
(Competition Issue)

				Tribunal:	STEPHEN OLIVER QC (Chairman)
						KENNETH GODDARD MBE 

Sitting in public in London on 18-22 July and on 3 and 4 November 2005

Gerald Barling QC and Julie Anderson, counsel, instructed by W J B Chiltern Ltd, tax consultants, for the Appellants

Christopher Vajda QC, Paul Harris and Ben Rayment, counsel, instructed by the general counsel and acting solicitor to The Commissioners for HMRC, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	These joined appeals concern the application of Article 4.5 of the Sixth VAT Directive in relation to the provision by local authorities of off-street parking services.  We refer to the four appellant local authorities collectively as “the Four Local Authorities”; when dealing with particular features of any one of them, we refer to it by its geographical area, e.g. Isle of Wight.  The appeals have been split into four issues.  The issue in this part of the proceedings is whether treatment of the Four Local Authorities in relation to the off-street parking activities as non-taxable persons would lead to significant distortions of competition for the purposes of Article 4.5.2.  
2.	The background to the proceedings is found in the Tribunal’s decisions on the “Special Legal Regime Issue” and the “Implementation Issue”.  These are reported in [2004] V&DR 68 and (2004) VAT Dec. 18557.  
3.	The Special Legal Regime Issue arose from the principle in Article 4.5 which excludes bodies governed by public law from the scope of VAT in connection with activities carried out “as” public authorities; HMRC (“the Customs”) had contended each of the Four Local Authorities were not carrying out their provision of off-street parking as public authorities under a special legal regime.  The Tribunal decided that they were.  The Customs did not appeal the decision on that issue.  
4.	The Implementation Issue arose because the Four Local Authorities had contended that Article 4.5 had not been implemented into UK law.  The Tribunal agreed.  The Customs appealed to the High Court which confirmed that Article 4.5 had not been implemented in to national law.  See the decision of Pumfrey J in Customs and Excise Commissioners v Isle of Wight Council [2005] STC 257.  To the extent that the parties to the present appeal were to rely on Article 4.5, the Judge added, at 267b, that reliance could not be placed on Article 4.5.1 “without assuming the burden of Article 4.5.2”; hence the present issue.
5.	In relation to the present issue, “the significant distortions of competition issue”, the Customs have, as indicated at the start of this decision, submitted that the treatment of the Four Local Authorities as non taxable persons in connection with the provision of off-street parking would lead to significant distortions of competition.  
6.	There remains “the overpayment issue”.  This may arise in two of the appeals.  The issue is whether any overpayment of off-street parking services provided by those Local authorities would fall within the charge to VAT.  Typically, it could arise where a parking machine was unable to give change and the period for which parking was permitted was restricted.  The last issue only arises if Article 4.5.2 applies so as to bring the provision of off-street parking within the scope of VAT.  
Legislation

7.	Because the UK has chosen not to implement Article 4.5 of the EC Sixth Directive the argument in the present case has turned on the proper construction and application of that provision and not on any domestic provisions. By Article 4.1, “taxable person” is defined to mean “any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity”. Paragraph 2 provides that:

“The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agriculture activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity.”

By Article 4.5:

“States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions.

However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as a non-taxable person would lead to significant distortions of competition.

In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided they are not carried out on such a small scale as to be negligible.

Member States may consider activities of these bodies which are exempt under article 13 or 28 as activities in which they engage in as public authorities.”

For ease of reference, in this decision the first, second, third and fourth paragraphs of Article 4.5 are referred to as Article 4.5.1, 4.5.2, 4.5.3 and 4.5.4 respectively. 

Introduction to arguments of the parties

8.	The Customs see Article 4.5.2 as a legislative tool designed to ensure fiscal neutrality. It aims, they say, to prevent economic operators carrying on the same activities from being treated differently for VAT purposes. Thus where, as here, local authorities and private operators engage in the same activities on a significant scale, the non-application of VAT becomes the very factor that causes distortions and a lack of neutrality.
9.	The Customs contend that Article 4.5 as a whole derogates from Article 4.1 and 4.2 and consequently is to be construed narrowly with the burden of proof falling on the Local authorities as the persons claiming to be entitled to the benefit of Article 4.5.1.  
10.	The non-imposition of VAT, the Customs argue, gives the local authority an artificial advantage over its private operator competitors in that, viewed prospectively, that factor could lead to a change in market share in favour of the local authorities.  That, they say, amounts to a distortion of competition that is not insignificant or de minimis.  The significance of the distortion is evidenced by the fact that in the UK 70 per cent of off-street parking is provided by local authorities (providing them with a gross revenue of £440 million in 2002/3) and 30 per cent of off-street parking is provided by private operators whose estimated gross revenue for the same period was £500 million.
11.	The Customs argue that a broad-brush approach is required.  On this approach a 17½ per cent differential is great enough to create a presumption that the non-application of VAT to local authorities would lead to distortions of competition. These could arise on the “demand side” where the market is local; and, where one local centre is competing against another centre in a different locality, where the market is regional.  They could arise on the “supply side” where the competition to supply parking space comes from national operators. On the demand side distortion of competition could arise, assuming the disapplication of VAT, consequent on local authority decisions to reduce their own charges in order to win customers from private operators competing in the local market. On the supply side the disapplication of VAT could lead local authorities to decide to retain and improve their own parks as distinct from transferring them, on “best value” principles (explained below), to private operators; and because the local authorities would no longer suffer VAT as an expense, they would have a bidding advantage over private operators competing for new sites and would be less inclined to enter into joint ventures with private operators.  In each case the distortion of competition could and would be significant.  
12.	The Four Local Authorities contend that the onus of showing that they are brought into charge to tax by Article 4.5.2 lies with the Customs.  They contend that the disapplication of VAT would result in no distortions of competition, let alone any significant distortions of competition. And in these respects they say that Article 4.5. is neither a derogation from Article 4.1 nor is it affected by principles of fiscal neutrality.
The issues for determination at this hearing
13.	It follows from the short summary of the arguments of both sides that the first issue for our determination is whether the Customs are correct in asserting that the Four Local Authorities bear the burden of proving that there would not be significant distortions of competition if they were afforded their right under the general rule in Article 4.5.1 to be treated as outside the scope of VAT in respect of their supplies of off-street car parking.
14.	The second main issue is whether, in the case of each of the Four Local Authorities, affording them their right under Article 4.5.1 to be treated as outside the scope of VAT in respect of their off-street parking services would lead to significant distortions of competition within the meaning of Article 4.5.2. That issue in turn raises the following sub-issues:
(a)	Whether the Customs are correct in adopting a cumulative nationwide “activity” approach in applying Article 4.5.2 rather than, as each local authority submits, a case by case approach.
(b)	Whether the evidence satisfies us that there would be any distortion of competition resulting solely from the treatment of the Four Local Authorities as outside the scope of VAT in relation to off-street parking either (i) in the particular market within which each of the local authorities operates or (ii) on a cumulative or nationwide scale.
(c)	If any relevant distortions of competition arising solely from the application of Article 4.5.1 are established, whether any distortion of competition in the relevant market is “significant” for these purposes in the light of the decisions of the ECJ so as to require application of  Article 4.5.2.
Before examining the facts relevant to the application of Article 4.5.2, we will consider, as preliminary issues, the first main question of where the burden of proof lies; we will then reach a decision on whether the cumulative nationwide “activity” approach adopted by the Customs is correct and we will address the meaning of the term “significant” in the context of the expression “significant distortions of competition”.
Burden of proof
15.	Does the burden of proving that the application of Article 4.5.1 would give rise to significant distortions of competition rest with the Customs? Or does the local authority in question have to satisfy us that its non-taxable status under Article 4.5.1 would not give rise to significant distortions of competition?
16.	By way of introduction we note that our decision on the special legal regime issue of 6 April 2004 decided that the Isle of Wight District Council was carrying out its provision of off-street parking as a public authority under a special legal regime.  Those “activities or transactions” therefore came within Article 4.5.1 and were, in principle, outside the scope of tax. The three other Local Authority Appellants, as joined parties, are covered by that decision. We decided also, as already noted, that Article 4.5 had not been implemented into the national law of the United Kingdom.  That matter was appealed to the High Court where, as noted, Pumfrey J, referring to the “claim” of the local authority to be excluded from charge by operation of Article 4.5 says:
“… before acceding to the Local Authority’s claim, the tribunal is bound to investigate whether its treatment as non-taxable in the activity in respect of which repayment of tax is sought is liable to give rise to a serious distortion of competition”.
17.	Summarizing the argument of the Customs in more detail, they say that Article 4.5. considered as a whole is a derogation from the general rule in Article 4.1 and 4.2 and, as with all derogations, it is to be construed narrowly; consistently with that approach the burden of proof falls on the person claiming to be entitled to it (here the Four Local Authorities).  Reliance is placed on paragraph 33 of the judgment of the Court of Justice in Ufficio Distrettuale delle Imposte Dirette di Fiorenzuola d’arda v Comune di Carpaneto Piacentino (Case 231/87) [1989] ECR 3233, [1991] STC 205.  (We refer to that decision as “Carpaneto 1”.)  Reference will be made to paragraph 33 later. The Customs rely also on the following words of Pumfrey J in paragraph 32 of the Isle of Wight Council decision:
“… The Local Authority cannot take the benefit of Article 4.5.1 without assuming the burden of Article 4.5.2”.
Moreover, contend the Customs, it is the duty of the Tribunal, as a state organ, to ensure that the application of Article 4.5 does not lead to significant distortions of competition.  
18.	In response, the Four Local Authorities say that Article 4.5.1 is the rule and Article 4.5.2 is the derogation.  The Customs, as the competent authority, are required by the Sixth Directive to treat the Four Local Authorities as non-taxable persons; and it is only where the Customs have established that the derogation in Article 4.5.2 applies that they may treat the Four Local Authorities as taxable.  
19.	Article 4 is not, we think, composed of a single general rule in Article 4.1 followed by derogations. Its structure is to define. In Article 4.1 and 4.2 it defines who are taxable persons by reference the condition that they should be carrying out specified economic activities; and in Article 4.5 it defines who are not.  Article 4.5 operates as a separate code governing states etc.; they are outside the scope of tax “in respect of the activities or transactions in which they engage as public authorities”. Article 4.5.1, as we read it, is the rule and Articles 4.5.2 and 4.5.3 are derogations. Support for this interpretation is found in the Court’s judgment in Carpaneto l where, in paragraph 22, it is said, in the context of the interpretation of Article 4.5:
“It should next be noted that the second sub-paragraph of that provision contains a derogation from the rule of treatment of bodies governed by public law as non-taxable persons in respect of activities or transactions engaged in by them as public authorities where that treatment would lead to significant distortions of competition.”
But does the later paragraph in the Court’s judgment in Carpaneto l (paragraph 33) relied on by the Commissioners alter that conclusion? The passage contains the answer to the fourth reference question (summarized in paragraph 29 of the judgment) which sought to ascertain whether a body governed by public law might rely on Article 4.5 for the purpose of opposing the application of a national provision making it subject to value added tax in respect of an activity in which it was engaged as a public authority and which was not listed in Annex D, where treatment of the activity as non-taxable is not liable to give rise to significant distortions of competition. The answer given by the Court in paragraph 33 was that a body governed by public law:
“may rely on Article 4.5 of the Sixth Directive for the purpose of opposing the application of a national provision making it subject to value added tax in respect of an activity in which it engages as a public authority, which is not listed in Annex D and whose treatment as non-taxable is not liable to give rise to significant distortions of competition.”
Nothing in paragraph 33 affects our conclusion that the burden of proving that Article 4.5.2 operates to bring a particular local authority into charge lies with the Customs.  The Court in Carpaneto l was in no way concerned with the question of where the burden of proof lay. It was dealing with the different question of whether Article 4.5 had direct effect. Nor was Pumfrey J dealing with the point when he made the statement extracted in paragraph 16 above.  He could not possibly have meant, when he referred to the local authority “assuming the burden of Article 4.5.2”, that the local authority assumed the burden of proof; he prefaced the whole sentence with the words – “It would not be correct to see this as a case in which …”
20.	Moreover the decision in Carpaneto l supports the case of the Four Local Authorities since at paragraph 31 the Court states that:
“Bodies governed by public law, which in this context must be assimilated to individuals, are therefore entitled to rely on that rule in respect of activities engaged in as public authorities but not listed in Annex D  to the Directive”.
That makes it clear that the local authorities are entitled to be treated as outside the scope of VAT if the activity in question is one which is engaged in as a public authority and it is not listed in Annex D. Paragraph 32 then indicates that the conclusion that public bodies are entitled to rely on Article 4.5 where they fulfil the criteria in paragraph 31 (being engaged in activities “as” a public authority and the activity not being one listed in Annex D) is not “invalidated by the fact that Article 4.5.2 … requires activities to be treated as taxable” by the competent authorities, and possibly the Court, and may require the latter to make an assessment of economic circumstances if there is a genuine concern that significant distortions of competition would flow from giving effect to the right in Article 4.5.1.  
21.	A further reason why the burden of proof must rest with the Commissioners was advanced by the Four Local Authorities. It is this.  Article 4.5 has not been implemented into UK national law. The Customs may not therefore rely, to the detriment of  a public body, on their failure to adopt provisions intended to facilitate application of the derogation, by requiring the public body to appeal in order to give effect to its rights under Article 4.5. This impermissible fetter on the exercise of directly effective rights is made all the more onerous if the public body is then required to prove a negative, abstract, proposition on that appeal. Such a requirement would infringe the well-established EC law principle that neither procedural rules nor rules as to the burden of proof may render the exercise of rights flowing from Community law excessively difficult. Requiring a proof of a negative in its present context would certainly infringe that principle.  As Advocate General Jacobs said:
“None of the parties should be subjected to a probatio diabolica; that is to say, compelled to prove something which cannot be proved or can only be proved with the utmost difficulty … It is a truism to say that proving of a negative is extremely difficult. Clearly the national courts must avoid applying unreasonable rules as to the burden and standard of proof”.  (See the joined cases C-429/93 Bristol-Myers Squibb & Others v Paranova [1996]  ECR 1-3459 at page 3501.)
We accept the force of that point.  It is in line with what we see to be the message to each Member State.  The Member State is directed to leave outside the charge to tax under its own regime activities falling within Article 4.5.1; it is directed to bring into charge those activities where exclusion would lead to significant distortions of competition.  How the Member State carries out that direction is left to it.  It can do so by legislation (as happened in Portugal, see below) or by leaving the matter to the domestic courts, as has happened in the UK.  But the responsibility does not lie with the “taxable person” to bring itself into charge by invoking Article 4.5.2.
The cumulative/nationwide “activities” approach
22.	The Customs say that the right approach in determining whether a distortion of competition is significant is to ask whether local authorities and private operators engage in the same activities on a significant scale; this may involve asking whether the income generated by the local authorities or the private operators is substantial when measured on a nationwide basis. The Four Local Authorities argue that that approach is wrong; the right approach is to examine the issue in accordance with the facts relating to each of them on the basis of the evidence that has been called as regards each of them respectively.  
23.	The Customs say the analysis of whether significant distortions of competition result from the non-application of VAT on parking should be broad-brush focusing, not on each local authority, but on the taxable activities that may be affected by the non-application of VAT. We refer to that as “the activities” approach.  Underlying Article 4.5 is, they say, the fundamental principle of neutrality of taxation in economic activities which has frequently been applied in a broad-brush way which is not based on a competition law analysis; see for example EC v French Republic (Case C-494/99). The differential of 17.5% in the amount that different persons engaged in the same economic activities could charge for those activities creates an effective presumption, say the Customs, that this would lead to distortions in the competitive conditions under which those activities are carried out save only for those situations where the amount of VAT or the scope of the activities is insignificant.   
24.	Support for the activities approach is said by the Customs to be found in Fazenda Publica v Camara Municipal do Porto (Case C-446/98) [2001] STC 560 (“Porto”).  There the Portuguese law provided that the Ministry was to define on a case by case basis the activities that might cause a distortion of competition. The Court of Justice accepted that that was a proper method of giving affect to Article 4.5.2 provided that the application of that law by the Portuguese Ministry was subject to “judicial review”. Particular emphasis was placed by the Customs on the opinion of the Advocate General (Alber) who in paragraph 58 considered that a national court should consider whether “a competitive market exists for those activities, i.e. whether the services are also offered by private persons…”  There was, it was said, no suggestion in Porto that it was necessary to examine local markets before VAT could be charged on the car parking activities of local authorities.  
25.	The activities approach is, we think, at odds with the words of Article 4, the decisions of the Court of Justice and the economic evidence.  We agree in this respect with the arguments advanced for the Four Local Authorities.  
26.	First, take Article 4.  Article 4.5 read in isolation gives some substance to the activities approach.  Article 4.5.1 can be read as saying that, to the extent that local authorities engage in activities as public authorities, they are outside the scope of VAT; but, by Article 4.5.2, those activities are to be within the charge where exclusion from tax would lead to significant distortions of competition, taking those activities on a nationwide basis.  But that reading ignores the use of the term “taxable person” in the first three paragraphs of Article 4.5.  A taxable person is defined in Article 4.1 as “any person who independently carries out … any economic activity” and by Article 4.2 these economic activities comprise “all activities of producers, traders and persons supplying services”.  The charge is therefore on the person and on that particular person’s activities; and the local authority in question is covered by those words.  Article 4.5.1 then places the local authority outside the charge by directing that it is not to be considered a taxable person, i.e. a person who independently carries out the activity in question, where it engages in that activity as a public authority.  Article 4.5.2 brings the particular local authorities back into charge where two conditions are satisfied.  “They” must engage in the economic activities as public authorities: and treatment as non-taxable person (i.e. otherwise than as persons who independently carry out economic activities) “would lead to significant distortions of competition”.  The emphasis at all relevant parts of Article 4 is on the individual “person”.  The correct approach, therefore, is to start with the person in question and, if it is a local authority, determine whether the activities of that local authority are outside the scope of charge to tax by reason of Article 4.5.1 or in charge by reason of Article 4.5.2.  The wrong approach is to start with the activities.  This conclusion was expressed more succinctly by Pumfrey J in the Isle of Wight appeal (supra) where in paragraph 13 he says:
“Article 4.5 exempts the specified public authorities from the charge to tax on the basis of who they are rather than on the nature of the business carried on by them.”
27.	Turning to the decisions of the European Court of Justice, we do not read them as leading to a different conclusion.  In EC v French Republic (Case C-404/99) the Commission was challenging France’s failure properly to implement Articles 2.1 and 11A.1(a) of the Sixth Directive.  The case concerned “service charges” included in the total prices charged on customers at restaurants.  The French administration had for many years applied an “administrative concession” which, subject to certain conditions being fulfilled, allowed the exclusion of those service charges from the charge to VAT on the restaurateur / employer.  The Court ruled that by excluding them from charge, the French government had failed to implement the Sixth Directive.  The matter for the Court was quite different from the matter before us.  The Court was there concerned with France’s failure to implement, which the Court approached as a general question of principle: it was not, as here, concerned with a particular local authority’s claim to be within Article 4.5.  
28.	It will be recalled that Customs argue that Article 4.5 is based on the principle of neutrality.  On that basis, we infer Customs to be saying that an activity (such as the provision of off-street parking) should be treated in the same way irrespective of the character of the provider.  The Court in EC v French Republic noted in paragraph 45 that:
“… according to settled case-law, the principle of fiscal neutrality, to which the Commission has also referred, precludes inter alia, economic operators carrying on the same activities from being treated differently so far as the levying of VAT is concerned”.
The Court had already decided the point in issue in that case and the question of fiscal neutrality was being canvassed in a quite different context to the present.  Moreover, the Court has in the later case of Waterschap Zeeus Vlaanderen v Staatsscetraris van Financien (Case C-378/02) [2005] STC 1298 “Waterschap” (to which we will refer) observed that exception from VAT (with particular reference to Article 4.5) is inherently likely to interfere with principles of neutrality and equality of treatment.  
29.	The relevant question in Porto, a case concerned with the letting by the Porto municipality of parking spaces, was whether the Portuguese Minister of Finance was authorised by Article 4.5.2 to define a significant distortion of competition on a case by case basis.  The Court’s third ruling was that the Member State was at liberty to authorise its finance administration to define what was covered by the concept of significant distortions of competition (and of negligible activities within Article 4.5.3) provided the administration’s decision was reviewable by the national courts.  In paragraph 32, the Court said that the administration might be entrusted –
“… with the task of specifying the situations in which an activity carried on by a body governed by public law may be regarded as bringing about significant distortions of competition … provided its decision or application may be reviewed by the national court”.
We do not read that passage as endorsing the activities approach argued for by the Customs in the present case.  Neither the Advocate General, in paragraph 58, nor the Court, had been considering a wider market than the actual market; in that case the actual market had been the markets in which the Porto municipality had been providing parking services.  Thus the activities approached advanced by the Customs in the present case had not been in issue in Porto.  
30.	Pumfrey J in the Isle of Wight appeal had the Porto proceedings in mind when he concluded (in paragraph 32) as follows:
“It would not be correct to see this as a case in which the local authority cannot take the benefit of Article 4.5.1 without assuming the burden of  Article 4.5.2. It might have been that Article 4.5.2 is too uncertain to have direct effect. But the decision of the Court is to the contrary. It follows, it seems to me, that before acceding to the local authority’s claim the tribunal is bound to investigate whether its treatment as non-taxable in the activity in respect of which repayment of tax is sought is liable to give rise to a significant distortion of competition.”
It follows therefore that Article 4.5 does not look to the geographic area delimited by a member state or to the class of activity in general. Articles 4.5.1 and 4.5.2 are not concerned with national borders. Rather, Article 4.5 focuses on a particular public body and then examines the competitive effects, if any, of that body’s treatment in the context of the relevant market in which it is active.
The “significance” issue
31.	The main issue on the facts of these appeals is whether we can be satisfied that there would be significant distortions of competition arising from the non-application of VAT to the Four Local Authorities’ off-street parking activities. As things stand we have already decided in the first decision concerning “special legal regime” that each of the Four Local Authorities is prima facie to be treated as outside the scope of VAT in respect of its off-street car parking activities.  And in paragraphs 17-21 above we have decided that the burden of satisfying us that Article 4.5.2 applies to bring those activities into charge lies with the Customs.  It follows that, to satisfy us that off-street car parking activities of the Four Local Authorities are within charge, the Customs have to demonstrate that treatment of those activities as outside the scope of VAT “would lead” to “significant distortions of competition”. Before examining the evidence going to the issue of significant distortions of competition we need to consider the meaning of that phrase. 
32.	The circumstances on which the Customs rely are summarized in paragraph 10 above and will be dealt with at greater length when we examine the facts.
33.	The Four Local Authorities stress that the exclusion of local authority activities from the scope of tax by Article 4.5.1 is the general rule. For the Customs to invoke Article 4.5.2 and bring the off-street parking activities into charge, they must satisfy the Tribunal that the distortion of competition resulting from the non-application of VAT is significant in the sense of something beyond the mere consequence of being outside the scope of charge to tax.  
34.	Until the Waterschap decision of the ECJ there was no authority directly in point.  The Attorney General in Carpaneto l at paragraph 20 raised the question of whether a local authority activity might be insignificant when, viewed nationally or locally, private operators had not taken up the opportunity of competing.  He did not answer the question.  He did not have to because he was there considering the different issue of whether and to what extent Article 4.5 had direct effect.  In the event his advice was not accepted by the Court in paragraphs 20-24 of the Judgment.
35.	Pumfrey J in the Isle of Wight appeal, when dealing with the potential application of Article 4.5.1 said of it that the tribunal was required to consider whether there would be “serious” distortions of competition.  In using that adjective he was foreshadowing the approach of the Court of Justice in Waterschap.  The Court, in paragraph 43, had accepted that the purpose of Article 4.1 was to exclude from the scope of VAT the activities of public bodies where they were acting as such; it was inherent in this that the placing of such activities outside the charge would “interfere to some extent with the application of the principle of neutrality and of equality of treatment”. The Advocate General (Jacobs) had used those words in paragraph 38 of his Opinion which went on with a short explanation:
“It is inherent in the existence of exceptions to the VAT system that they will interfere to some extent with the application of the principles of neutrality and equality of treatment. Whatever the merits of the decision to treat public bodies as final consumers, it forms an integral part of the Directive.  In that and in comparable situations, the treatment of taxable persons and persons excluded from the VAT system will inevitably be different.  
…..
40.	However, the difference in treatment alone cannot in my view be regarded as giving rise to a significant distortion of competition for the purposes of the second sub-paragraph of Article 4.5. If it were, almost any transaction carried out by a public body acting as such would fall within that provision.
41.	The purpose of the first sub-paragraph of Article 4.5 is to exclude the activities of public bodies acting in their capacity as public authorities from the sphere of VAT, in principle, with whatever consequences that entails.  The purpose of the second sub-paragraph is to avoid any significant distortions of competition, which must necessarily be exceptional in comparison to the normal consequences of the exclusion if the second sub-paragraph is not to wholly override the first.  The difference in treatment in the present case is a normal consequence of the exclusion and so cannot fall within the second sub-paragraph.”
36.	It follows from the decision of the Court in Waterschap and the Opinion of the Advocate General that before the derogation in Article 4.5.2 can apply there must be something by way of distortions of competition which are “exceptional”, i.e. have effects above and beyond those which are the normal consequences of the fact that the public body is active in the same market as a private body and is treated as outside the scope of VAT. A self-evidently obvious “normal” consequence of this is that the public body in question would not be required to account for VAT on any charges made for its services, whereas a private company active in the same market would be so required. The corollary of this is that the public body would have the capacity to lower its charges without affecting its net revenue, or to leave its charges unchanged and retain additional revenue. So much is the wholly unexceptional “normal” result of the public body being outside the scope of VAT. Such circumstances alone therefore cannot, we think, constitute “significant distortions of competition” for these purposes. 
37.	Consequently, if Waterschap applies here, the Customs have to do more than point to the difference in position between a public body and a private operator that inevitably results from the application of Article 4.5.1.  
38.	The Customs say that Waterschap is not applicable. The passages set out above were, they say, obiter and in any event the Court did not in terms  adopt the explanation given by the Advocate General in paragraphs 40 and 41 of his Opinion.  We do not accept either of these points. The Court was dealing with a primary ground put forward by the taxable person and giving reasons why it did not accept that ground.  Its unqualified acceptance of the Advocate General’s advice strongly implies that it accepted his reasoning.  The Customs argue that Waterschap does not apply because it was concerned with a claim for relief for input tax as distinct from, as here, the question whether supplies were outside the scope. We do not see that as a valid distinction.  Both issues depend on the common question of whether the public body’s activities were at the relevant time outside the scope of VAT. The Customs say that the company in the Waterschap decision, which had incurred the relevant expenditure while outside the scope and  later opted to become a taxable person (as the Dutch regime permitted) and then claimed relief, was in a quite distinct position.  The distinction arose, (as the Court had observed in paragraph 43) from that company’s exercise of its right to opt.  That is so, but it does not affect the general rule or principle underlying Article 4.5, which is that activities of public bodies acting as such are outside the scope unless the Member State invokes Article 4.5.2 on grounds of “significant distortions of competition”.  
39.	The Waterschap approach resolves the difficulty of giving a function to Article 4.5.1 as regards the wide range of activities of  public bodies that exist alongside similar activities of private operators. If the difference in tax treatment were the feature that counted as a significant distortion of competition then the derogation in Article 4.5.2 would be automatically engaged and the objective of excluding public bodies from the scope of VAT, as the Advocate General indicated, would be defeated.  But if the difference in VAT treatment, taken alone, is to be left out of account, the function of Article 4.5.1 is left intact. 
40.	The Court’s decision in Waterschap (at paragraph 43) expressly endorses the Advocate General’s advice that it is inherent in exceptions to the VAT system, such as Article 4.5, that they interfere with the application of the principles of fiscal neutrality and equality of treatment.  This calls in question the basis of the Customs’ approach.  This approach, as noted above, is to argue that in any case where local authorities generally engage in the same activiites as private operators, the non-application of VAT and its consequential effect on the principle of neutrality would result in a distortion of competition; and that such a distortion is “significant” where local authorities and private operators engage in the same activites on a significant scale and where the gross income generated by the authorities or the private operators in substantial when measured on a national basis (see paragraph 10 above).  The answer to that is that interference with the principles of neutrality and equality of treatment is inherent in Article 4.5.1.  There must, as Advocate General observed, be some distortive effect that is exceptional in comparison with the normal consequences of removing the local authority service from the scope of VAT.  There is, as we will show later, nothing exceptional about any of the consequences upon which the Commissioners rely in this regard.
The expression “would lead to” in Article 4.5.2
41.	It is common ground that Article 4.5.2 requires the determination of whether the disapplication of VAT on off-street parking would lead to a significant distortion of competition to be based on objective factors and on the evidence.  The Customs say that the approach must be to assess the likelihood of future effects of the disapplication of VAT; these are effects on demand for substitute car parks in a particular local area, the effect on demand for particular car parks in particular regions and the effect on supply of off-street parking nationally across the United Kingdom.  That sort of assessment which involves looking at future effects is, say the Customs, in line with, e.g. the decision of the Court of First Instance in Case T-288/97 Regione Friuli Venezia Giulia v Commission (“Fruili”) [2001] ECR II 1169 paragraphs 49-50.  There the Court asked whether a state aid of a revenue nature to small road haulage companies whose activities had no effect on competition and trade between Member states could not be excluded from the scope of Article 87 of the Treaty.  The Court had phrased the relevant question as being whether the state aid was capable of affecting trade; moreover, the Court observed, the fact that an Italian haulier in receipt of such aid did not trade with other Member States could still distort competition by depriving hauliers in those other Member States in developing their trade in Italy.
42.	Friuli does not, we think, advance the Customs’ argument that a significant distortion of competition is the likely effect of the disapplication of VAT.  Article 87 imposes a strict regime on state aid; it leaves no room for a de minimis rule.  The regime is deliberately strict to ensure notification of an aid whatever the scale of the aid.  But that is not this case.  Here the question is whether the disapplication of VAT on local authority parking would lead to significant distortions of competition, a matter that calls for an exercise of judgment.  It is inherent in Article 4.5.1 that local authorities are afforded the benefit (and burden) of having their car parking activities excluded from the scope of VAT.  Hence the present exercise is to determine a matter which was not in issue in Friuli namely whether some effects over and above the normal consequences of that benefit would ensue as the result of the local authority’s exclusion from VAT so as to produce an effect that damages the competitive position of its rivals, the private operators.
43.	Friuli does however show that a distortion of competition can exist where a competitor on the supply side is precluded from entering the market because the disapplication of VAT on local authority parking authorities enables, for example, the local authority to keep its parking activities in house rather than outsource them by some means to private operators.  
44.	Finally on the question of approach to the expression “would lead to significant distortions of competition” in Article 4.5.2, in relation to the disapplication of VAT on parking activities of local authorities, both sides addressed the level of probability required by those words.  The Four Local Authorities contend that the person on whom the burden of proof lies (the Customs in the present case) must demonstrate this to a high degree of probability.  The Customs contend that a possible distortion of competition in the future is enough for Article 4.5.2 to be engaged.  This follows, say the Customs, from the opinion of the Advocate General in Carpaneto 2 (Case L-4/89).  There, in paragraph 22, the Advocate General said:
“It follows that, under Article 4.5.2, the Member states are not merely required to tax bodies subject to public law if their treatment as a non-taxable person under Article 4.5.1 would lead to significant distortions of competition but must also exclude them from VAT if distortions of competition to which their exclusion is likely to lead are not “significant”, that is to say they must comply with the rule of non-taxation notwithstanding the fact that distortions of competition are not possible if those distortions are not “significant”.” 
That passage and particularly the Advocate General’s statement that one can only exclude a “possible” distortion of competition if that distortion is not significant, shows that a possible distortion of competition in the future is sufficient.  
45.	We do not find Carpanetto 2 sufficiently in point to be helpful.  Our function is to decide on the evidence whether the disapplication of the VAT on local authority parking activities would lead to significant distortions of competition.  Carpaneto 2 was not concerned with the level or standard of proof called for by Article 4.5.1.  
Witnesses
46.	The Four Local Authorities called: 
		Peter Taylor, Traffic Manager with the Isle of Wight Council
David Elliott, Highways and Transportation Design Manager for South Tyneside Borough Council
Raymond Lee, Assets and Contracts Manager for Mid-Suffolk District Council
Martyn Baker, Car Parks Manager in the Highways and Engineering Department of West Berkshire District Council
The Customs called:
Arthur Sedgwick whose experience of car park activities included consultancy, research and industry representation.  We were not clear whether he had been called as an expert or as a witness of fact.  We have nonetheless taken account of his evidence.  
George William McLean, the Off-Street Director at National Car Parks Limited, a company with a nationwide coverage of commercial car parks including car parks in all of the Four Local Authority areas except Mid-Suffolk.
Paul Gallagher, Director of Britannia Car Parks Limited, the company that has been operating the Drill Hall Road (Lugley Street) Car Park in Newport, Isle of Wight.
Expert Witnesses:
47.	The witnesses called to give expert witness to the Tribunal were:
Dr Helen Jenkins D Phil BEc of Oxera Consulting Limited, a professional economist.  She was nominated by the Four Local Authorities.
Robin Aaronson, an economist with experience of the analysis of competition in specific markets.  He was nominated by the Customs.
Both expert witnesses provided separate reports and two joint reports summarising the common ground between them.
The arguments on the facts – an overview
48.	For the Customs it was contended that there would be significant distortions of competition arising from the disapplication of VAT on local authority off-street parking activities.  These would arise from the fact, first, that the charges at some local authorities’ car parks would become relatively lower than they otherwise would have been with the result that the local authorities would win additional customers.   Second, it was argued that local authorities would have more of their own money to invest in refurbishment and rebuilding of car parks and less inclined to dispose of the car parks to the private sector or to enter into “Public Private Partnerships” (“PPPs”).  Third, it was argued that local authorities would be at an advantage where leases of new car park sites were put out to tender.  Fourth, it was argued that local authorities would be less inclined to dispose of their car parks to private operators or put them into joint ventures with private operators.  Each of those four contentions was based on the four propositions found at the conclusion of Mr Aaronson’s written report.  
49.	The Four Local Authorities respond stating that no finding of significant distortions of competition is justified.  This is because on the evidence the fact that their provision of off-street parking service is outside the scope of VAT will not affect the charging, investment or partnering policies of the Four Local Authorities.  The evidential factors that the Four Local Authorities say demonstrate that no change in relevant policy is likely to occur are set out in the summary below which covers features common to all the Four Local Authorities and the particular circumstances of each of the Four Local Authorities.  
50.	The Four Local Authorities’ “fall back” position, should the Tribunal not accept the above, is that no alteration in policy having an effect on competition in the markets relevant to the particular local authority is likely.  Generally, and in relation to each local authority they say that there is no material evidence that could justify a finding that there would be significant distortions of competition if any of the Four Local Authorities were to use the disapplication of VAT on off-street parking to reduce prices.  Moreover, they say, there is no evidence to support a conclusion that competition would be severely distorted by the disapplication of VAT in a way that created an unwillingness on the part of the Four Local Authorities and / or private operators to enter into joint ventures or other forms of partnership.
Relevant features common to the car parking activities of all Four Local Authorities 
51.	We turn now to examine the relevant features that are common to our approach to the car parking activities of all Four Local Authorities.  
52.	For clarification we mention that, with a 17.5 per cent rate of VAT, a tax inclusive charge of £1 contains a VAT element of  approximately 15 pence.  
The approach of the experts
53.	Competition, as we understand the term from the evidence of the experts is the rivalry between providers of services operating in the same market.  Distortion occurs in a continuing state of competition where one or more of the providers has an artificial advantage over the other or others.  
54.	Where the service in question is the provision of car parking facilities, markets are, the experts agree, local in character.  Drivers chose their car park because it is close to the amenity, e.g. the shopping or leisure centre that they are using.  We accept that.  
55.	Within the market for car parks, some parks would be substitutes for others.  The equal closeness of two or more parks to the driver’s destination is a main feature of substitutability.  Price will be another.  Price will not, generally, override the significance of location.  The particular circumstances of the charging structure applying at a particular car park may exclude it from being a substitute for another one.  For example, a store car park that provides free parking for its store customers but imposes a penally high charge on others will not be a substitute for a normal amenity off-street car park.
56.	Competition law has, Dr Jenkins explained, developed a set of guidelines precisely to determine whether two products are sufficiently close substitutes to be in the same market.  The test is known as the “hypothetical monopolist test”.  According to the Office of Fair Trading Market Definition guidelines, a market is defined by identifying a focal product and focal area and assuming that a hypothetical profit-maximising firm produces all these products.  Reference was made to OFT (2004) “Market Definition”, OFT 403 December, paragraph 2.  The test then asks whether it would be profitable for this hypothetical monopolist to raise prices by a small but material amount (usually 5 to 10 per cent).  If the answer is yes, the relevant market has been found.  A relevant market is a group of products and a geographic area is no bigger than is necessary to satisfy this test.  There was no challenge as to the acceptability of this test.  
57.	The policies of local authorities for charging at local authority car parks have mixed objectives.  The traffic control and environmental policies are dealt with later but revenue raising is a consideration (in some, but not all, cases) in the creation of those policies.
58.	Where a local authority decides to reduce its parking charges (or not to raise them at a comparable rate to that of the private operators) the extent to which the reduction would lead to a distortion of competition would depend on how consumers responded to the charging structure and the extent on spare capacity in the local authority parks in the same market.  The response of the consumer will depend on the “elasticity” of prices for parking in the area, i.e. the extent for which demand is conditioned by price.  
59.	Arising from those points is the “demand side” proposition advanced by Mr Aaronson.  By demand side competition we mean competition for customers between providers of the same or similar services.  This proposition, as already noted, is that significant distortions of competition will result from the disapplication of VAT on car parking activities of Local authorities because prices at some local authority parks will, over time, be somewhat lower than they would otherwise have been and local authorities would consequently win some additional customers because of motorists switching from privately operated car parks to local authority parks.
60.	From the point of view of suppliers of parking services, distortions as between them could arise from changes to investment incentives and decisions of local authorities not to contract out parking activities to, or enter into joint ventures with, private operators; this is the case even if no distortions of competition would arise from changes in the pricing policy of the particular local authority.  In this connection, the experts agree, the fact that VAT is payable on the provision by private operators of parking services that they have taken over from the local authority will not prevent the local authority and the private operator from agreeing an outsourcing deal where the local authority enters into the deal because the private operator has a greater ability than has the local authority to finance the capital investment in the car park or is in a better position to operate the car park profitably.  The private operator will be in a strong bargaining position; consequently the fact that VAT is payable on the services provided for the transferred or outsourced undertaking will not prevent the parties from agreeing the deal.  On the other hand, when the benefits (financial and non-financial) of private operators are less marked but still sufficient to permit contracting out under the present regime, the disapplication of VAT on local authority parking will make it less likely that terms will be agreed for contracting out.
61.	Also, from the point of view of the supplier, most local authorities do not invest in new parking sites; and a local authority is most unlikely to invest in a new park, solely because of the extra revenue that might be generated.  There is a shortage of sites for new car parks in town centres, save where capacity is expandable by, for example, converting surface parks to multi storey parks.
62.	Arising from these “supply side” points are the three propositions offered by Mr Aaronson which were shortly summarised in paragraph 48 above and will be dealt with in more detail when we come to examine the supply side circumstances in more detail.  
63.	Common to all Four Local Authorities and to the four propositions identified by Mr Aaronson is a four-step approach suggested by Dr Jenkins which we now summarize. 
64.	First, we need to consider whether it is likely that the local authority in question would change its parking policy (or when we come to deal with the supply side, its investment strategy) as a result of the disapplication of VAT on local authority parking.  This calls for an understanding of the obligations and policies of the local authority in question with regard to parking charges (and where appropriate to the choice of investment projects).  If these would change following the disapplication of VAT, then we would need to form a view as to whether privately operated car park users might switch to local authority car parks.  That leads to the second enquiry, which is whether any local authority car parks are potential substitutes for privately operated parks.  If so, the third step is to determine what effect on a privately operated park any change in charging policies of the local authority might have on sales as a result of the disapplication of VAT; and if competition would be distorted, would it be significant?  The fourth step is to enquire whether any significant distortions of competition could arise in the future as the result of the disapplication of VAT.  We will address the last three steps when we examine the particular circumstances of the Four Local Authorities.
65.	Starting with the first step, we assess how likely it is that the disapplication of VAT on local authority parking activities would lead to a local authority changing its pricing policy.  For this purpose we will summarise the main statutory obligations relating to the car parking activities of local authorities and their effect on the parking policies of the local authorities.  If the local authority in question is unlikely to make any changes in pricing policies as a result of the disapplication of VAT, such disapplication would not have a distorting effect.  In this connection, we recall what we understand to be the approach to Article 4.5.2 as required by the Waterschap decision.  We are looking for changes which go beyond the normal consequences of the disapplication of VAT, such as the exploitation by the local authority in question of the advantage of being excluded from VAT to earn it a larger share of the market.  
Statutory obligations and government objectives shaping policies of the Four Local authorities in relation car parking activities 
66.	Traffic management is the basis on which local authorities are empowered to provide and control the use of off-street parking.  See section 32(1) of the Road Traffic Regulations Act 1984 which gives local authorities those powers “for the purposes of relieving or preventing congestion of traffic”.  Transport Act 2000 requires local authorities to develop policies and draw up local authority plans integrating with the regional transport plan and taking account of national policies.  We will refer to the particular Local Transport Plans when we come to deal with each of the Four Local Authorities.  
67.	Local authorities are required to conform with national legislation covering environment, planning and climate change.  An example is the Environment Act 1995 which imposes air quality objectives on local authorities.  Local authorities use the provision of car parks as a means of stimulating the economic vitality of particular locations.  They provide free spaces for the disabled and in other ways encourage access for tourists.
Relevant policies of local authorities common to all Four Local Authorities 
Pricing policy
68.	Local authorities are not subject to the same pressures and considerations that guide the policies of private sector providers.  None of the Four Local Authorities has a policy of maximising profit from car parks.  In common with all local authorities, they are under no statutory obligation to do so, nor are they required to set their car parking charges by reference to the costs of providing the facilities.  But in the cases of all Four Local Authorities, the revenues from car parking are not held separately, i.e. ringfenced, for parking purposes.  They go to the council’s common funds from which allocations are made for all the purposes of that council’s activities and obligations.  Allocations for parking purposes are the result of how the council chooses to balance these competing demands.  The disapplication of VAT will not, we accept, affect any of those factors.
69.	Traffic management by managing demand is the central factor in setting pricing policies among the Four Local Authorities.  The emphasis of the vast majority of local authorities, said Mr Sedgwick, has been to concentrate on controlling or reducing car usage by various means such as improving public transport and increasing parking charges at a higher rate than inflation.  The effect on revenue for charging structures designed to manage traffic, to provide free parking for the disabled and to stimulate the local economy is a factor that is considered, but is not an objective.  This, we are satisfied, will remain the position irrespective of the disapplication of VAT on local authority parking activities. 
70.	The time lag in implementing a change to parking charges may be considerable and will remain so whatever happens to VAT.  Orders under the local government parking regulations have to be drafted and circulated for public consultation.  The proposals are open to the democratic process and may be accepted or rejected on grounds that have nothing to do with price maximisation.  Overall, the time required to effect a change will be between three and six months and price changes tend to take place every three years.  The object is to keep the charges simple and consistent throughout the particular local authority area so that users can understand the pricing structure. 
71.	On-street parking has never been subject to VAT and yet in all the Four Local Authorities areas, off-street parking and on-street parking have been dealt with in the same way.  The pricing decisions for on-street parking have no regard, as Dr Jenkins pointed out, to the cost differential between those two forms of parking.  
72.	Whether and to what extent the disapplication of VAT on local authority parking would lead to the Four Local Authorities changing their pricing policies is a topic we will address when we come to look at the facts of each of them.  Before that, there are some points of general application we need to mention.
The private operators
73.	The private operators are taxable persons within Article 4.1 but their “economic activities” are of a significantly different nature from those of the Four Local Authorities.  The Four Local Authorities, as we decided in the first decision, carry out their provision of off-street parking as public authorities under a “special legal regime”; the impact of that regime on their pricing policies, generally, has been summarised in paragraphs 68 to 72 above.  The statutory and other constraints that we have identified impede the Four Local Authorities from acting competitively.  By contrast, the private operators are free to act as competitively as the demands of the market require.  Unless there is a planning or contractual constraint on this, they can adjust their charges swiftly whenever they choose and to whatever levels they wish.  They can adopt and maintain any strategy they choose including undercutting (as is done by Britannia in the Isle of Wight) or charging a premium over other car parks (as is done by NCP).  They operate for profit.  They seek to operate in areas where demand is high and returns are high.  Demand management is no part of their function; if anything the opposite is the case.  They are adversely affected, according to Mr McLean by environmentally driven measures, such as congestion charges.  They are in no way obligated to serve the uncongested areas of the country.  
Block booking and season tickets
74.	It was argued for the Customs that competition for block booking was an area where prices would be distorted through the disapplication of VAT on local authority parking activities. 
75.	Block bookings, unlike season tickets, take spaces out of the market for so long as the block booking in question lasts.  Businesses registered for VAT are the usual takers for block booking contracts.  They will be indifferent to the existence of VAT on parking charges because it will be their input tax.  The disapplication of VAT will, if charges remain the same, mean that the business user is disadvantaged and may switch to a privately operated park in the same market where the charge, after VAT, is lower than the local authority’s free of VAT charge.  However, the evidence of all Four Local Authorities shows (as will be seen) that none of them enters into block booking contracts.  We do not therefore see this as a relevant feature in our determination.  
76.	Season ticket sales by local authorities to VAT registered business customers would, overall, become more “expensive” to the customer following the disapplication of VAT on the local authority’s parking activities.  The customer would, we infer, find it cheaper to buy season tickets from private operators whose parks are in the same market and whose charges, after VAT, are lower than those of the local authority.  There could therefore be some switching of business away from the local authorities and there could be a corresponding reaction by the local authority by adjusting its season ticket prices downwards.  
77.	We record that the Isle of Wight offers a discounted rate on season tickets and that West Berkshire offers discounted season tickets to Vodafone employees for parking in Newbury.  We heard evidence from Mr McLean that NCP had been involved in some bids for block booking contracts against local authorities in other areas of the UK.  Mr Sedgwick gave evidence to the same effect.  Whatever happens in other areas is, (for reasons we have given in paragraphs 22-31 above) beside the point.  We are, as explained above, concerned only with the question of whether the disapplication of VAT would result in significant distortions of competition in the Four Local Authority areas.  None of the evidence that we have heard in relation to block bookings and season tickets gives us any indication that there could be significant distortions of competition.
Is competition between different regions following the disapplication of VAT a relevant consideration in determining whether significant distortions of competition would result?
78.	The demand side proposition, as advanced by Mr Aaronson, requires an assessment of whether significant distortions of competition would result from the disapplication of VAT on local authority parking activities so far as it had an effect on demand for car parks in separate markets that are more or less equally accessible to the user.  The Customs point to the choice that drivers have between different shopping or leisure activity locations in different areas within the wider geographic region.  Car parks across the geographic region should therefore be regarded as potentially substitutable and hence in competition with each other.  Cheltenham, it was suggested, was a competitor with Gloucester.  In support of this, the Customs referred to an observation of the RAC Foundation in its report “Parking in Transport Policy” (December 2004) that local authority parking policies are “a complex mixture of objectives including managing demand, providing an income stream for the local authority and avoiding losing trade to other potential competing economic centres”.
79.	Whether there is any substance in the point calls for an assumption, first, that the disapplication of VAT occurs in one local authority area within the geographic region (Gloucester) and not in another (Cheltenham) and, second, that the car parks in one area, e.g. Cheltenham, are substitutes for the car parks in another area, e.g. Gloucester, and, third, that the local authority benefiting from the disapplication of VAT (e.g. Gloucester) would cut its parking charges to win trade from Cheltenham.
80.	We are not persuaded that significant distortions of competition “would” result from the disapplication of VAT in situations of this nature.  The argument, such as it is, is based on supposition and not on evidence.  We heard no evidence of, for example, price warfare between competing local authorities.  The Planning Policy Guidelines (PPG 13) issued by the Office of the Deputy Prime Minister are applicable generally.  These provide in terms that “Charges for parking [should] not undermine the vitality of other town centres”.  This suggests to us that it is inherently unlikely that any local authority would defy PPG 13 and even more unlikely that local authorities generally would, as the result of the disapplication of VAT, be induced to compete with other local authorities within a larger geographic region.  Still less is it likely that there are price-sensitive motorists living between two such areas who would be influenced only by the difference in parking charges.
The Four Local Authority areas: relevant features
81.	We turn now to examine the relevant facts and features of each local authority’s parking activities.  The summaries will contain matters which are relevant to the question of distortions of competition on the demand side as well as those relevant to the supply side.  The supply side is dealt with as a separate topic after we have drawn conclusions relating to any possible demand side competition.
The Isle of Wight
82.	The Isle of Wight has 79 local authority car parks.  Of these, 29 are free.  Three car parks are operated by private operators.  All three are in Newport.  Newport is at the centre of the Isle of Wight.  It is the Isle of Wight’s main shopping and commercial centre.  
83.	Newport has five local authority car parks.  All are within five minutes walk of each other in the main shopping area.  Church Litten, Chapel Street and Lugley Street operate a standard short stay facility where charges range from 50 pence for up to 30 minutes to £3 for four hours.  New Street and Sea Street charges start range from 50 pence for up to three hours to £3 for 24 hours.  
84.	Of Newport’s three privately operated parks, NCP operates one, a car park attached to a retail store in Pyle Street; this is close to the Church Litten and Sea Street parks.  The charges range from 50 pence for up to one hour to £10 for six to 24 hours.  The Pyle Street park may be used free of charge by shoppers who spend £5 at particular stores so long as they do not park for more than two hours (otherwise the charge is £5 an hour and £30 for five to six hours).  Britannia operates another, a surface park at Drill Hall Road / Hearn Street.  This is two / three minutes walk from the local authority parks at Lugley Street and New Street.  The Britannia charges range from 70 pence for up to one hour and £2.80 for six to 24 hours.  
85.	The Isle of Wight’s conditions for tariffs for on-street parking are similar to those for adjacent off-street parking, save that there is a small premium for the limited on-street parking spaces adjacent to the shops at the centre of Newport.  The premium is for traffic management reasons, explained Mr Taylor.  Free parking is provided by the Isle of Wight everywhere for Blue Badge holders.  
86.	The Isle of Wight does not provide block booking facilities (and never has).  This, Mr Taylor said, would be contrary to its published plans and objectives.  We accept that evidence.  
87.	In common with other Local authorities, the Isle of Wight is governed by traffic management legislation. It has power to provide off-street parking but this is to be exercised as a means of relieving or preventing congestion.  
88.	The Isle of Wight’s stated policy is not to increase provision of car parking.  Its aim, said Mr Taylor, is to manage what spaces it has as efficiently as possible while reducing the need to travel.  Parking charges are reviewed on average every three years.  In setting parking charges, the Isle of Wight is not led by what the private operators are charging.  The Council would not, as Mr Taylor saw it, reduce charges: that might stimulate new demand.  To that he added a qualification relating to residents parking.  The new administration (following the 2005 election) proposed to introduce residents’ annual permits.  These are to cost £50 (or £30 for “concessions”).  These permits allow two hours parking on short-stay local authority parks and unlimited parking on long stay local authority car parks.  The “cost” of the permit scheme to the Isle of Wight has been estimated at £1 million.  
89.	Demand for parking spaces on the Isle of Wight varies and is subject to seasonal pressures.  Spare capacity is more usual at the beginning and end of a day and there is high demand in summer.  
90.	The Council has never bid against a private operator for a new site and in the unlikely event that planning permission were given for a new town centre car park, the Council would not, said Mr Taylor, bid against any commercial operator seeking to run that park.  We accept that.
91.	The Isle of Wight does not engage in any PPPs in respect of off-street parking provision.  The Isle of Wight has no policy of releasing Council car parks to the private sector and this would not change as the result of the disapplication of VAT on local authority parking activities.  
92.	Mr Taylor confirmed that the Isle of Wight was not required to generate funds or to maximise revenue or indeed to make a profit from car parking.  It had no policy to that effect.  Their charging policies are determined with an eye to achieving their statutory and other objectives and as a means of regulating the use of a scarce resource.  We were referred in this connection to a report of the Isle of Wight Environment and Transport Select Committee (of 2004) which emphasized the need to manage the availability of parking spaces and road space through price controls.  The Isle of Wight Local Transport Plan stressed the need for measures that influence behaviour either by encouraging less reliance on the car or reducing the length of journeys.  So far as planning policies were concerned, we were referred to PPG 13 which states, among other things, that planning policies in relation to car parking should not require developers to provide more spaces than they themselves wish and generally minimise the need for parking by avoiding increases in traffic congestion caused by too many cars.
Would the disapplication of VAT on Council parking activities lead to significant distortions of competition in the Isle of Wight?
93.	We have considered the evidence of Mr Taylor and the various reports and recommendations covering parking policy.  We recognise that he, in common with the witnesses for the three other Local Authorities cannot speak as a policy maker with responsibility for financial and budgetary decisions.  Nonetheless we are satisfied, in the light of his evidence and from our own reading of the Isle of Wight Unitary Development Plan and other reports that the Isle of Wight does not at present set its car parking charges according to revenue-raising objectives.  We are satisfied, further, that the Isle of Wight does not regard itself as a competitor with the private operators in the area.  We see no reason why the disapplication of VAT should affect the Isle of Wight’s pricing decisions in respect of their parking services.  In principle therefore, we see no need to go on and consider steps two to four of Dr Jenkins’ approach (see paragraph 64 above).   However, we proceed to ask whether any of the existing privately operated parks on the Isle of Wight could potentially be affected by the disapplication of VAT.
94.	Three of these parks offer the possibility that Isle of Wight Local Authority car parks might be substitutes for the private operators’ facilities.  The Pyle Street (store) park potentially competes with Council car parks.  Its pricing makes it likely that the tariffs are set to encourage users at these particular stores.  The Council car parks are already cheaper for non customers for all the time bands except for the 1-2 hour band.  This suggests that significant switching is not likely to occur in response to small changes.  Moreover the evidence contained in the Isle of Wight Council Parking Study of November 2001 reveals that the four nearby local authority car parks (Church Litten, Medina Avenue, New Street and Chapel Street) are full or almost full most of the time during shopping and commercial hours.  There is therefore only limited scope for switching from the Pyle Street car park.  
95.	The Drill Hall Road / Hearn Street car park(s) potentially compete with the local authority parks.  Pricing here is similar across the two car parks.  If the disapplication of VAT were to be reflected in price changes to all local authority car parks, this would mean a 10 – 20 per cent price differential.  The evidence of Mr McLean was that NCP could generally sustain such price differentials (as between themselves and neighbouring car parks) because of the good location and appearance of NCP parks and the quality of the service, e.g. security, provided there.  The local authority car parks likely to be considered as potential substitutes face some significant capacity restrictions.  This means that the Isle of Wight is unlikely to see any revenue benefit from reducing prices, as no extra demand can be accommodated, and there can be little switching because of limited capacity.  Lugley Street and Church Litten have limited spare capacity and Chapel Street has around 40 spaces in all.  This is only 25 per cent of the Hearn Street capacity.  It is therefore unlikely that any significant distortive effect on competition in respect of this particular privately operated park would result from the disapplication of VAT on local authority parking activities, even if the Isle of Wight pricing were to be changed.
96.	Our conclusion, in relation to the Isle of Wight is that we are not satisfied that there would be any significant distortions of competition, on the demand side, in relation to any existing commercial car parks situated on the Isle of Wight as the result of disapplication of VAT to the provision of off-street car parking provided by the Isle of Wight.
South Tyneside Metropolitan Borough Council
97.	There are 36 local authority car parks in South Tyneside.  Of these, 18 are free.  Free parking is provided for the disabled.  South Shields is the main urban centre.  There are two privately operated car parks there (and the library park which is part-time privately operated).
98.	South Tyneside operates the roof top car park in the Denmark Centre in South Shields.  This service is, among other things, the bingo hall and is operated for the owners of the bingo hall.  
99.	The rest of the Denmark Centre park is operated by Euro Car Parks as are the Saville Street park and (on Saturdays only) the library park.  All those have immediate access to the shops.  Saville Street charges are 50 pence an hour and the library park is 40 pence an hour.  
100.	Of the remaining parks (all local authority) used by visitors to the shopping part of South Shields, there are four to the north west of Saville Street, three on the western side of the borough and one further west.  Charges for all those are 30 – 40 pence per hour.  There are nine car parks (local authority) along the waterfront.
101.	No charges are made for car parks in uncongested areas.  Free parking is provided to disabled badge holders.  There are four on-street car parking areas in South Tyneside which are subject to the same tariffs and conditions as adjacent off-street parking provided by the Council.  
102.	David Elliott expressed the view that the choice of park by the customer was affected by where he or she comes from.  A driver comes across a Euro Car Park first when driving into South Shields and would be most likely to park there irrespective of the lower charges made for the Council parks.  Location was the important thing.  Mr Elliott went on to explain that South Tyneside has a high unemployment rate with a low level of car ownership and limited land supply for parking for shoppers, as distinct for parking for purposes associated with industrial use in industrial areas.  The objective of his Council was to operate parking as part of its traffic management strategy (in line with the South Tyneside Local Transport and Unitary Development Plan) while ensuring that parking, which was regarded by the Council as important to the economic vitality of the borough, remained affordable to all.  The Council aimed to attract people into the area.  None of those points was challenged by the Customs. In this connection, we note Mr Aaronson’s evidence that the Council runs its parking services at a loss (budgeted at 15 per cent of income in the 2005/6 Revenue Budget).  
103.	South Tyneside took note of the private operators’ parking charges but this did not dictate its charging policy.  The Council, Mr Elliott said, did not have a practice of investing revenues from car parks in their car parking activities.  He could foresee no likelihood that the Council would reduce parking charges.  The last thing the Council would want to do, in Mr Elliott’s opinion, was to lower parking charges and increase demand.  South Tyneside kept an eye on charges made by other local authority areas, but these did not dictate its own charging policy.
104.	The Council does not engage in any block booking.  It sells season tickets at a discount; but there is, in Mr Elliott’s view, no likelihood of prices for these being reduced.
105.	No circumstances had arisen in which South Tyneside had bid against a private operator for a new site.  
106.	South Tyneside had reacted to the best value requirements of the Local Government Act 1999 by outsourcing “enforcement” of parking restrictions.  They had consulted on parking by sending out a questionnaire to customers who were 85 per cent satisfied.  In practice, South Tyneside regarded safety of the parking facilities as much a requirement of best value as price competition.  
107.	There was no evidence that South Tyneside had at any time engaged in any joint venture for the operation of car parks with private operators (leaving aside the car park at the top of the Denmark Centre).  Nor was there any evidence of any plans to do so. 
108.	Mr Elliott explained that parking was part of South Tyneside’s general budget.  Receipts from parking charges were paid into South Tyneside’s general funds and were not, for example, ring fenced for parking purposes.  It was his view that the application or otherwise of VAT to parking charges would have no influence on Council decisions generally, and the Council would continue to carry out maintenance through its existing building contractors rather than make use of the services of private operators. 
Would the disapplication of VAT to local authority parking activities lead to significant distortions of competition in South Tyneside?
109.	We are satisfied, in the light of Mr Elliott’s evidence (which we accept) and the reports referred to above, that South Tyneside does not at present set its parking charges according to revenue raising objectives; its policy on parking charges is governed by demand management objectives and in this respect it applies the national and regional policies summarised in paragraphs 66 to 68 above.
110.	South Tyneside charges are already below the charges of the private operators.  South Tyneside, as Mr Elliott explained, is concerned to ensure that its car parks and parking charges are such as to stimulate the economic vitality of the borough and, we infer, the shopping areas where these parks are located.  To this end, South Tyneside’s aim is to make its parks affordable while at the same time discouraging short journeys.  Another factor is that South Tyneside provides free parking for all in 18 out of its 36 parks and for disabled persons in the remainder.  Those features suggest that South Tyneside’s policy is not to maximise revenues or to make its charges relate to the costs of providing the parking service. 
111.	Those features are likely to remain irrespective of any disapplication of VAT.  Thus we see no reason why the disapplication of VAT should affect South Tyneside’s pricing decisions in respect of their parking services.  Nonetheless, we will go ahead to see whether competition with any privately operated parks could be distorted significantly as a result of the disapplication of VAT.
112.	The library car park is operated by Euro Car Parks and available for public parking on Saturdays.  This car park potentially competes with Council car parks.  The Saville Street park, also in South Shields and also operated by Euro Car Parks, potentially competes with Council car parks.  The evidence of the parking charges shows that, apart from on Sundays, the local authority car parks are already cheaper than the Euro Car Parks for stays of over one hour.  This suggests that demand for car parking is inelastic as the Euro Car Parks are viable with charges that are, for certain bands, several times greater than those of the nearby local authority car parks.  This leads to the conclusion that a lowering of local authority parking charges in response to the disapplication of VAT would not lead to significant demand switching away from the Euro Car Parks.  Moreover, from the evidence summarised above, we think it is unlikely that off-street parking charges will be changed following the disapplication of VAT.  Even if there were some change, it is, we think, unlikely that it would result in a significant harmful effect on competition in respect of any existing privately operated car parks in the area.
Mid-Suffolk District Council 
113.	We heard evidence from Mr R S Lee, Assets and Contracts Manager for Mid-Suffolk.  We were provided with (among other papers) the Suffolk Local Transport Plan 2001-2006 and the Draft Regional Planning Guidance for East Anglia.  
114.	There are 13 local authority car parks in the Mid-Suffolk district.  Eight of these are free.  There are no commercial operators in the area.  There is a non-local authority car park at Stowmarket railway station provided by the rail operator.  
115.	There are no charges for on-street parking by the local authority.  Free parking is provided for disabled Blue Badge holders.  
116.	The local authority does not and, on the evidence of Mr Lee, would not engage in block booking of spaces.  The stated policy of the local authority is not to increase the provision of car parking.  Mr Lee’s evidence is that there is no land left in the region which has appropriate land use designation for planning purpose to be used as car parking; consequently, no new car parks are likely to be developed.  There are no commercial operators in the region and, consequently, the concept of bidding for sites has no application.  
117.	The local authority carries out the refurbishment of the car parks using local building contractors.  It is not engaged in any public-private partnership or other joint venture in respect of off-street parking provision.  
118.	Turning to documentary evidence of the local authority’s parking objective, the Suffolk Local Transport Plan 2001-2006 states that parking is a key element in helping manage the demand for car use and that research has shown that reducing the number of car parking spaces in urban areas can significantly reduce car use.  The Draft Regional Planning Guidance for East Anglia suggests managing the demand for travel by controlling travel demand through encouraging alternative travel modes and, for example, encouraging “park-and-ride” sites.  
119.	The features summarised above (which we accept) indicate that Mid-Suffolk has set its car parking charges for policy reasons and in particular to further its demand management objectives.  There are no grounds for concluding that disapplication of VAT to local authority parking activities would result in Mid-Suffolk dropping its charging rates, let alone causing any distortion of competition.  Moreover, the evidence suggests that new investment into car parks is unlikely.  The Suffolk Local Transport Plan 2001-2006 recommends the reduction of car parking stock, particularly long stay.
120.	There is, as noted, one non-local authority car park in Mid-Suffolk, i.e. Stowmarket railway station.  This, we understand, tends to be full and is used mainly by train travellers who are unlikely to switch to Council car parks which are further away from the station.  Mr Lee stated that people park in the Bury Street (local authority) car park to go to the station because of capacity constraints at the station car park.  This indicates that there is excess demand for the station car park and suggests that if Council car park charges were lowered as a result of the disapplication of VAT this would not have any significant harmful effect on competition in respect of the Stowmarket station car park.
West Berkshire District Council 
121.	We heard evidence from Martyn Baker, the Car Parks Manager in the Highways and Engineering Department.  
122.	There are 32 local authority car parks of which five are free.  
123.	There is one car park in Newbury which is operated by a private operator (this is West Street car park operated by Euro Car Parks).  There are two other car parks that could potentially be affected by changes in prices arising from the disapplication of VAT.  These are the Pangbourne Working Men’s Club and the Railway car park run by the Rail Operator at Thatcham.  
124.	The Council has one area of on-street parking in Hungerford under a traffic order.  This is subject to the same Council policies as its off-street parking provision.  Refurbishment of West Berkshire car parks is carried out by the Council using building contractors.  West Berkshire does not engage in block booking of spaces and, according to Mr Baker’s evidence, would not do so.  Nor, he said, would West Berkshire bid against  private operators for new sites.  
125.	West Berkshire is not engaged in any public / private partnership in respect of off-street parking provision.  However, in respect of the proposed Parkway development in Newbury which replaces existing Council surface car parks with an underground car park, it has been determined that this park will be operated by a private operator and that the private sector will provide the capital investment.
126.	Traffic management policies were explained by Mr Baker who said that the charging policy in the West Berkshire town centres is to encourage short stay parking and discourage long stay car parking by setting relatively high long stay charges to discourage use by commuters.  Even where the West Berkshire parks are located adjacent to railway parking, the policy is to ensure that long stay charges are set significant higher than those in the railway parking areas to deter use by commuters where this would otherwise have an adverse effect on local businesses.  This indicates that West Berkshire does not compete with private operators for car parking.  Moreover, West Berkshire aims to conform with PPG 13 by generally seeking to restrict car parking demand.  In this connection, the Local Transport Plan 2001/2 – 2005/6 shows that parking charges are set on the basis of demand.  
127.	Addressing the question of whether West Berkshire’s decisions to invest in car parking related matters would be affected by the disapplication of VAT, Mr Baker stressed that revenue income from car parks is not related to future investment into car parks.  As with the other Councils, the costs and revenues generated by parking form part of the central “pot” of West Berkshire’s finances.  This indicates that investment decisions in West Berkshire are made independently of the revenue that can be attributable to the relevant activities.
128.	We are satisfied from the evidence that West Berkshire’s policy is not to maximise revenue or to make charges for parking that relate to the costs of those services.  Those features are likely to remain irrespective of any disapplication of VAT to local authority parking activities.  We see no reason why the disapplication of VAT should effect West Berkshire’s pricing decisions in respect of their parking services.  We will however look at the evidence and see whether competition with any privately operated parks could be distorted significantly as a result of the disapplication of VAT.  
129.	Most of the privately operated car parks in West Berkshire appear to us to be in a separate market from the local authority car parks on the basis of either their location or restrictions on usage that make the local authority parks poor substitutes.  There remain three privately operated parks that could potentially be affected by changes in parking charges resulting from the disapplication of VAT.  These are, as already noted, the Euro Car Parks in Newbury, the Railway car park at Thatcham and the Pangbourne Working Men’s Club.  The Euro Car Parks’ park in Newbury has, as a possible local authority competitor, the Northbrook multi storey park.  Euro Car Parks appear to wish to attract shoppers as short stay customers; penalties are imposed after three hours.  At the Northbrook multi-storey, on the other hand, there is no penalty for long stay.  The local authority car park charges are higher, showing that West Berkshire is not seeking to take customers from Euro Car Parks.  Even if the full reduction in VAT were to be applied to West Berkshire’s charges, they would still only be equal to the Euro Car Parks’ charges.  We cannot see that this would be likely to produce significant switching even if such pricing policy were adopted (which on the evidence of Mr Baker, it would not be).  Furthermore the Euro Car Parks site has, we were told (and this was not challenged), easier access than the Northbrook multi storey.  
130.	At the railway station in Thatcham, there is a local authority and a non-local authority car park on opposite sides of the railway lines.  Both car parks are usually full of rail users, according to the evidence of Mr Baker.  The West Berkshire car park has 30 spaces and the non-local authority car park has 90 spaces.  There is no real capacity for switching and so no incentive for either side to lower prices.  
131.	The Pangbourne Working Men’s Club potentially competes with West Berkshire Council car parks that are already cheaper for the one-hour band, the three-hour band and for one of them (the River Meadow car park), all subsequent bands.  This suggests that demand for car parking is inelastic as the Pangbourne Working Men’s Club car park is viable despite having charges that are, for most bands, several times greater than the Council car parks.  We infer, therefore, that a lowering of West Berkshire parking charges in response to the disapplication of VAT would not lead to significant demand switching away from the Pangbourne Working Men’s Club, which, it appears, is simply more convenient, being much better located near the shops than any of the other car parks.
132.	To conclude on West Berkshire, there is, as we see it, little evidence that any VAT changes will result in increases or decreases in its parking charges.  As we have noted, only three privately operated car parks could potentially be affected by changes arising as a result of the disapplication of VAT and it is unlikely that any distortion of competition would arise, let alone a significant one.  
General conclusions on whether the disapplication of VAT on local authority parking activities would lead to significant distortions of competition on the demand side
133.	The evidence reviewed above does not, we think, point to a conclusion that the disapplication of VAT in respect of the off-street car parking activities of local authorities would lead to significant distortions of competition in any of the areas covered by the Four Local Authorities.  All the Four Local Authorities have the statutory obligations to manage traffic and in particular to manage the demand for  car parking.  How they have implemented that has varied from council to council.  In view of the circumstances and evidence summarized above we cannot accept Mr Aaronson’s first proposition, namely that following the disapplication of VAT, local authority charges would over time be lower than they would otherwise have been.  We are satisfied on the evidence that the disapplication of VAT would not lead to significant distortions of competition on the demand side.  
Will the disapplication of VAT on local authority car parking activities lead to distortions of competition on the supply side?
134.	The issue here is whether private operators will be put at a competitive disadvantage as the result of the disapplication of VAT by being kept out of the market as car park providers.  Mr Aaronson identified three areas where the disapplication of VAT could create significant distortions of competition on the supply side.  First, he postulated, instead of local authorities disposing of existing car parks that required refurbishment and rebuilding, or entering into PPPs, they would be more inclined to invest their own money on those works.  Second, he postulated, the local authorities would be disinclined to sell, lease or contract out the operation of their existing car parks to private operators or to put them into joint ventures with private operators.   Third, he said, where freehold owners leased out existing or new sites by tender, local authorities would be more likely to bid higher and win more tenders; the result would be more sites ending up as local authority operated car parks.  We will leave the third point over for later consideration.
135.	The evidence suggests that the private sector sees its main future opportunity as expanding into the local authority markets.  In this respect we recognise that the exclusion of a private operator from the opportunity of becoming a supplier of car parking facilities could amount to a distortion of competition.  So long as it was a normal consequence flowing from the disapplication of VAT,  it would not, as we interpret the Waterschap decision bring Article 4.5.2 into play.  For Article 4.5.2 to apply, we must be satisfied that the exclusion of the private operator goes beyond the normal consequence of the disapplication of VAT on local authority parking activities thereby producing an effect on competition that is significant.  We would need to be satisfied that, for example, Local authorities would exploit their advantage so as to keep the private operators out of the market as suppliers.
136.	We heard evidence from Mr McLean and Mr Sedgwick that local authority parks all over the UK and not just in the Four Local Authority areas were in need of refurbishment and rebuilding.  We accept that.  Many were 35 to 45 years old and little had been spent on them since they had been built.  It was suggested for the Customs that the effect of the disapplication of VAT as regards local authority car parking activities would be to provide local authorities with more cash resources to enable them to do the works themselves; financial considerations would favour the works being done and the parks being kept in-house.  It was suggested for the Customs with reference to evidence from Mr McLean that local authorities would be less likely to enter into joint ventures and partnerships with private operators.  The local authorities in question would do better financially to make use of the benefit of the disapplication of VAT by operating their parks in-house.  The private operators would find it difficult to achieve a significant rate of return on a joint venture project because of the need to compensate the local authorities for the favourable financial positions they were giving up, i.e. freedom from VAT on their returns from the car parks.  Mr McLean pointed to deals that had been done by NCP in St Albans and Birmingham.  He explained also that sources of capital for building and refurbishing were available to local authorities which did not consequently have to rely on private operators for capital funding.  Mr Gallagher’s evidence was to much the same effect.  The result of the disapplication of VAT would, it was suggested for Customs, be a drop in deals by which local authorities transferred the operation of car parks to private operators.  
137.	Those factors, it was said for the Customs, lead to the conclusion that individual and collective market shares of private operators in a number of urban areas in the UK are likely to be lower in the future as the result of the disapplication of VAT.  Another likely consequence of the disapplication of VAT is on the relative shares of the private operators of the market in providing parking-related facilities.  Some private operators might, it was suggested by the Customs on the basis of Mr Aaronson’s evidence, do deals of lower rates of return than, say, NCP and so win business at NCP’s expense.  Also, the disapplication of VAT could induce a particular private operator to withdraw from a joint venture, consequently making it easier for the remaining competitors on the private side of the market.
138.	Before dealing with the particular circumstances of the Four Local Authorities, we will examine the first two of the factors postulated by Mr Aaronson (in paragraph 134 above) as an overall UK wide “activity” exercise.  The opening question is whether, as Dr Jenkins put it in relation to the demand side of the approach, it is likely that the local authority would change its policy on whether to outsource or otherwise as the result of the disapplication of VAT.
139.	We cannot entirely exclude the possibility that the financial considerations taken in isolation might in particular cases appear to weigh in favour of the particular local authority keeping a car park in-house and financing and undertaking any necessary building and refurbishment itself.  But we heard no persuasive evidence to that effect.  We are instead persuaded that other benefits afforded by the involvement of private operators could outweigh the purely financial one of keeping the parking undertaking in-house.  We refer in this connection to the evidence of the experts at the end of paragraph 60 above.  As already indicated, we heard evidence from Mr McLean and Mr Sedgwick of the run down and inefficient state of many local authority car parks.  They told us of the significant enhancements in terms of injections of capital, operating efficiencies, cost savings, economies of scale, specialisation and operating skills that private operators are in a position to bring to bear on the parking operations of local authorities.  Those features call in question the assertion that local authorities would, following the disapplication of VAT, depart from a course of encouraging the participation of private operators.  
140.	Best value considerations cannot be ignored.  These require the local authorities to review the value and quality of the service provided by them.  They are required to consider the possible advantages of using competition to provide the particular services.  We note that the Audit Commission has, with regard to certain Best Value reports made by individual local authorities, recommended that those councils should more actively pursue fair competition as a means of securing efficient and effective parking services.  Providing services at the cheapest cost to the user cannot therefore be the local authority’s only consideration; it has to look at the whole picture and in particular at the quality of the service.  The local authorities are required to report on their best value exercise and are exposed to scrutiny by the Audit Commissioners.  Having regard to the evident efficiencies and benefits that the private operators can bring to bear, we see best value considerations as pointing against the likelihood that the disapplication of VAT would cause local authorities to drop any policies of doing deals, such as joint ventures and partnerships, with private operators.  Finally on this point, we are not persuaded that the advantages of the disapplication of VAT cannot be passed on to private operators which enter into joint venture deals with local authorities.  So long as the supply of the parking services is made by the local authority in the course of an activity in which it engages as a public authority, exclusion from VAT will follow from Article 4.5.1.  The local authority and the private operator might, for example, structure a joint venture deal under which the local authority supplies the parking service as principal, while the private operator gets a compensation for its introduction of capital and expertise which is equivalent to what it would have earned had it provided the parking services itself.
141.	Overall, and taking a general UK-wide view, we accept the joint evidence of the experts that, whether the local authorities pay VAT or not on their car parking activities, contracting out the operation of car parks by local authorities is likely to be agreed, always so long as the benefits, financial and non-financial (i.e. those identified above), afforded by the private operators are substantial.  The less the non-financial advantages, the less likely it is that, following the disapplication of VAT, contracting out terms will be agreed.  But, having regard to the evidence, that seems unlikely.
142.	We turn now to refurbishment and rebuilding.  The question here is whether the investments in these are likely to be kept in house as the result of the disapplication of VAT.  
143.	The Four Local Authorities have annual budgets for refurbishment.  The evidence from the Four Local Authorities indicates that the disapplication of VAT would in no way effect plans for refurbishment.  This is confirmed by Mr Aaronson’s evidence, who doubted whether the extra availability of cash from parking charges, following the disapplication of VAT, would encourage local authorities to invest more in car parks.  Even where the investment leads to new car parks, Mr Aaronson concluded that the amount invested by local authorities would be modest.  So far as the Four Local Authorities are concerned, none of them use commercial car park operators to carry out refurbishments and, as we understand the evidence, none has any plans to do so in the foreseeable future.  We are therefore bound to conclude that the disapplication of VAT would not affect the position in respect of refurbishment.
144.	Regarding investments in more car parks or in more parking spaces, the evidence from both the Four Local Authority witnesses and the Customs witnesses shows that any surplus resulting from the disapplication of VAT would go into the general funds of the Council in question and would not be applied to car parking.  Indeed, none of the Four Local Authorities has any plans to increase the number of its car parks.  Instead, their policy is to keep the demand for car parking static as a means of traffic management.  Other constraints on investment in more car parks by the Four Local Authorities are planning restrictions, environmental objectives, shortage of land and (in the experience of the Isle of Wight) public opposition to a multi storey car park in Cowes.  
145.	Would the disapplication of VAT result in a reduction or disappearance of joint ventures or partnerships between any of the Four Local Authorities and private operators such as to exclude the private operators from the market as providers of parking thereby causing a significant distortions of competition?  The evidence for the Four Local Authorities, which we accept, is that none of them is currently involved in joint ventures with private operators.  Nor, subject to one point, have any of the Four Local Authorities any fixed plans to enter into joint ventures or in some other way to outsource their parking activities to private operators.  We heard evidence from West Berkshire (already noted in paragraph 125 above) about the Parkway development in Newbury.  This proposed development, scheduled to start in 2007, involves the replacement of three of the West Berkshire surface parks with a large underground park.  The agreement is that this should be run by private operators and that finance would be provided from private sources.  The disapplication of VAT to local authority parking activities would not stop this development going ahead.  
146.	Would private operators lose out in tender bids for new parking sites (see Mr Aaronson’s third proposition)?   Mr Aaronson’s unchallenged evidence was that the financial consequence of the disapplication of VAT would be to increase the profitability of local authority parking operations by, on average, 43 per cent; this, it was suggested for the Customs would incentivise local authorities to increase their involvement in car parking by bidding for new sites and enhancing their capacity to win such bids.  The evidence for the Four Local Authorities is that they do not engage in bidding for new sites or bidding to retain existing sites.  There was no evidence that local authorities would be included as potential bidders.  According to Mr McLean and Mr Sedgwick, landlords do not favour local authorities as tenants.  Local authorities have poor histories of investment and efficiency and tend, for social reasons, to go for lower revenues by, for example, admitting Blue Badge holders.
147.	All those factors indicate that the disapplication of VAT on local authority parking activities should not have the effect of reducing the opportunities of private operators to participate in joint ventures and partnerships with local authorities.   Our impression is that there are relatively few opportunities in this field.  We recall Mr McLean telling us that “barely one in ten or one in fifteen” of such projects gets off the ground.  Regarding the proposition that local authorities would be in a better position to win tender bids, we doubt this.  Decisions to go for new parking development projects are taken, not by the parking managers, but by those with financial control over the affairs of the local authority; in any event, parking revenues go into central funds and are spent according to central financing decisions.  
Conclusions on whether the disapplication of VAT on local authority parking activities would result in significant distortions of competition on the supply side
148.	The position of particular local authorities in large metropolitan areas may be such that the disapplication of VAT could shut out private operators as potential providers of car parks and parking services thereby leading to some distortions of competition.  We do not have the evidence to reach any conclusion on that.  But as regards the Four Local Authorities, we have no reservations in deciding that the disapplication of VAT would not result in any distortions of competition, let alone significant distortions of competition, so far as concerns the supply side.  There is no evidence to support the argument for the Customs in relation to the Four Local Authorities.  There is no evidence that any of the Four Local Authorities would be inclined to exploit the advantage of the disapplication of VAT so as to keep private operators out of the market as suppliers.  The actual evidence shows that the Four Local Authorities have no joint venture or partnering arrangements in place at the present time and do not envisage any taking place in the foreseeable future (save for West Berkshire’s proposed Parkway development).  
Conclusions
149.	The Customs have not, in our view, discharged the burden of proof in the case of any of the Four Local Authorities of showing that the disapplication of VAT on the parking activities of those local authorities would result in significant distortions of competition.  And even if we were wrong in that, and that the burden of proving that the Article 4.5.2 derogation rests with the Four Local Authorities, we think that they have satisfied us that the disapplication of VAT in relation to their off-street car parking activities would not lead to significant distortions of competition within the meaning of that provision.  
152.	We allow the appeals.  We see no reason why the costs should not follow the outcome of the appeal.  We therefore direct that the Customs shall pay to the Four Local Authorities amounts equal to their costs.  If the amounts cannot be agreed, the matter should be referred to us for further directions.

STEPHEN OLIVER QC
CHAIRMAN
RELEASED: 23 January 2006

LON/2000/653, LON/2001/733, LON/2001/762, LON/2001/805