20353

Zero-Rating – Supply by port agent of hotel and taxi services for ship’s crew – Whether supply to agent or to ship’s owner – S.47(3) VATA 1994 considered – Whether supply related to direct needs of ship – Article 15 Sixth Directive – Whether supply for handling of ship – Item 6 Group 8 of Schedule 8 of VATA – Whether national legislation consistent with Sixth Directive – Whether national legislation wider than Sixth Directive – Appeal allowed

LONDON TRIBUNAL CENTRE

GEORGE HAMMOND PLC	           Appellant

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

Tribunal:	MISS J C GORT (Chairman)
MR M M HOSSAIN FCA, FCIB

Sitting in public in London on 24 July 2007

Mr John Shelley, solicitor, for the Appellant

Mr Philip Moser of counsel, instructed by the Solicitor’s Office, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This is an appeal against a decision of the Commissioners contained in a letter dated 15 March 2006 that the Appellant’s re-supply in the course of its business as a Port Agent of items such as hotel accommodation and taxis should not be zero-rated for VAT purposes on the grounds that the re-supply did not fall within Schedule 8, Group 8, item 6(a) of the Value Added Tax Act 1994 (“VATA”).  

Background

2.	The Appellant, George Hammond Plc (“Hammonds”) acts as a port agent for a number of ship owners.  The business started in or about 1767 under the name of “John Hammond”, and operates from offices in Dover.  It is a member of the Institute of Chartered Shipbrokers.  It provides various services to different ship owners, those services being in part dictated by custom, in part by conditions of contract and in some degree by standards imposed by the Institute of Chartered Shipbrokers.  It provides the ship owner with such facilities as the ship owner may require for the purposes of servicing the requirements of the ship, its passengers, its cargo and its crew, both when vessels are in port and also when they are on the high seas.

3.	The matters in dispute are: (i) the provision by Hammonds of taxis to transport the ship’s crew to and from the ship and (ii) the arrangement of hotel accommodation for the ship’s crew when they are accommodated off the ship.

The law

4.	Section 47(3) of the VATA provides:

“47	Agents etc.

(3)	Where … services are supplied through an agent who acts in his own name, the commissioners may, if they think fit, treat the supply both as a supply to the agent and as a supply by the agent.  

Article 15 of the Sixth Directive (77/388/EEC, as amended) now Article 148(a), (c) and (d) of the new VAT Directive (2006/112/EC) provides where relevant:

15.	Without prejudice to other Community provisions Member State shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any evasion, avoidance or abuse:

…

(4)	The supply of goods for the fuelling and provisioning of vessels:

(a)	used for navigation on the high seas and carrying passengers for or used for the purpose of commercial, industrial or fishing activities;
(b)	used for rescue or assistance at sea, or for inshore fishing, with the exception, for the latter, of  ships’ provisions;
…

(5)	The supply, modification, repair, maintenance, chartering and hiring of the sea-going vessels referred to in paragraph 4(a) and (b) and the supplying, hiring, repair and maintenance of equipment – including fishing equipment – incorporated or used therein;

… 

(8)	The supply of services other than those referred to in paragraph 5, to meet the direct needs of the sea-going vessels referred to in that paragraph or of that cargo.

5.	The Merchant Shipping Act 1995 provides:

“47.-(1)	Subject to subsection (2) below, the Secretary of State may make regulations – 

(a)	requiring ships to which this section applies to carry such number of qualified officers of any description, qualified doctors and qualified cooks and such number of other seamen or qualified seamen of any description as may be specified in the regulations; and 
(b)	prescribing or enabling the Secretary of State to specify standards of competence to be attained and other conditions to be satisfied (subject to any exceptions allowed by or under the regulations) by officers and other seamen of any description in order to be qualified for the purposes of this section.

49.-(1)	Subject to section 48, if a ship to which this section applies goes to sea or attempts to go to sea without carrying such officers and other seamen as it is required to be carried under section 47, the owner or master shall be liable – 

(a)	on summary conviction, to a fine not exceeding the statutory maximum;
(b)	on  conviction on indictment, to a fine; and the ship, if in the United Kingdom, may be detained.

53.	Where a United Kingdom ship does not carry a doctor among the seamen employed in it the master shall make arrangements for securing that any medical attention on board  the ship is given either by him or under his supervision by a person appointed by him for the purpose.

6.	Article 15 of the Sixth Directive (77/388/EEC) (now Article 418(a), (c) and (d) of the new VAT Directive 2006/112/EC) provides:

“15.  Without prejudice to other Community provisions Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any evasion, avoidance or abuse: 

…

(4)  The supply of goods for the fuelling and provisioning of vessels:

(a)  used for navigation on the high seas and carrying passengers for reward  or used for the purpose of commercial, industrial or fishing activities;  

(b)  used for rescue or assistance at sea, or for ensure fishing, with the exception, for the latter, of ships provisions;

…

(5)  The supply, modification, repair, maintenance, chartering and hiring of the sea going vessels referred to in paragraph 4(a) and (b) and the supply, hiring, repair and maintenance of equipment – including fishing equipment – incorporated or used therein;

(8)  The supply of services other than those referred to in paragraph 5, to meet the direct needs of the sea-going vessels referred to in that paragraph or of their cargo.”

Schedule 8, Group 8 item 6 of the VATA provides:

1  The supply, repair or maintenance of a qualifying ship the modification or conversion of any such ship provided that when so modified or converted it will remain a qualifying ship. 

	6  Any services provided for –

(a)  the handling of ships or aircrafts in a port, Customs and Excise airport or outside the United Kingdom; or …

7.	The Tribunal was referred to the following cases:

Case C-185/89 Staatssecretaris van Financien v Velker International Oil Co [1991] STC 640, Sociète Internationale de Tèlècommunication Aeronautiques (SITA) v HMCE [2004] STC 950, Case C-181/04-C-183/04 Elmeka v Ipourgos Ikonomikon [206] All ER (D) 67, 348/87, Berkholz v Finanzampt Hamburg-Mitte-Altstadt [1985] ECR 251, Marleasing Sa v La Commercial International de Alimentacionsa [1990] ECR 4135,  John Grieve (Decision No. 20149), Barclays Bank Plc v HMRC (Decision No. 19302), Redrow Group Plc [1999] UK HL4 and Halifax Plc and Others v The Commissioners of Customs and Excise (Case C-255/02) 21 February 2006

The facts

8.	Hammonds do not have any standard conditions of contract with the ship owners, and they work to the conditions of contract imposed by the individual ship owners.  There are contractual variations from one shipping line to another, although they are broadly similar and comprise a general list of port services all or any of which Hammonds may be called upon to provide in the individual circumstances of each vessel and the requirements of the ship owner and the ship’s master.  In some instances the contract with the ship owner will set out a list of potential service requirements, in other instances the port agent’s duties are more likely to be inferred from long usage and the ship owner’s requirements.  The overall obligations tend to be much the same in all cases and for all port agents, both in the United Kingdom and internationally.

9.	Hammonds’ contractual obligations are generally expressed to be purposive rather than task specific, and the manner of the performance of any obligation or task is left to the discretion of Hammonds.  Many tasks are performed by third parties who are engaged by Hammonds who contract for such services in their own name, as they do for the hotel accommodation and taxi services. The invoices with regard to these services by third parties are invoiced directly to Hammonds as the principal contracting party, and it is Hammonds to whom any credit facilities are given.  The individual ship owners have no contact with the suppliers, many of whom have long standing relationships with Hammonds.  Hammonds itself reclaims as input the VAT charged on such third party invoices, but it charges the supplies made to these third parties on to the ship owners at cost with no VAT element.  

10.	We have seen an invoice addressed to Hammonds from Dover Harbour board in respect of the hire of a crane which was needed for the ship `Saga Ruby’ to undertake a repair to the ship’s lifeboat. This invoice is in the sum of £275 and carries a value added tax charge of £48.13. The invoice is made out to George Hammond Plc and was paid by them.  It was then charged on at cost to the Saga shipping company, with whom Hammonds have a contract, where it was included in a global invoice to Saga shipping which was zero-rated for VAT purposes.  It was not suggested by the Commissioners that Hammonds ought to have treated that particular item as a standard-rated charge.  We also saw an invoice made out to Hammonds by Harwich taxis in the sum of £70 with VAT charged in the sum of 87p being expressed to apply only to ‘admin’ charges.  The invoice states inter alia: “Rotterdam-Harwich-28 July 2006 … 26.07.2006 2 x Immigration Officers Harwich to Stansted Airport £70.”  Mr Moser told the Tribunal that the Commissioners were not concerned with this particular invoice, in respect of which there had been no input recovery by the Appellant beyond the 87p in respect of the administration charges, although it had been charged on to the ship owner and treated as a zero-rated supply.

11.	Examples of ancillary services which Hammonds contract out to third parties are: 

(i)  Pilotage, which may include transport and accommodation for the pilot either to or from a ship, especially in cases where a pilot has to be carried on board because of weather conditions and needs repatriation.  

(ii)  Transport and accommodation for people carrying out regulatory functions and certification requirement (such as the testing of fire equipment, navigation and life saving gear) which are imposed on ship owners and masters.  

(iii)  Shore side accommodation which may be necessary because the crew cannot stay on board ship because of repair work being done, or for some other health and safety reason, or the ship’s engineer may need to attend a shore side machine shop to inspect a repair to the ship’s navigation gear. Crew changes frequently require transport and accommodation to be provided.  

12.	It was Hammonds’ normal practice to have a standing agreement with each shipping line under which they service the vessel according to a pre-set charge, namely a `cost per ship’, the amount of which will vary depending on the type or class of ship.  However, one-off special rates usually apply in cases where a vessel makes an unscheduled call, due, for example, to breakdown or other mishap.  This basic charge normally appears on invoices as the “Agency Harbour” charge.  It is also agreed (or sometimes understood from long practice) with the ship owner that any direct third party `ship’s specific’ costs incurred by Hammond will be added to the basic charge for billing purposes.  Hammonds keep a running account of the costs associated with each vessel and any third party expenses they incur.  Invoices to the ship owner show a breakdown of the third party expenses (exclusive of VAT) as well as the basic charge.  The ship owner is then provided with an itemised zero-rated bill from Hammonds.  Invoices are normally rendered to the ship owner, some however are rendered to the ship charterers, and some are split, as circumstances require.

13.	We were shown extensive Marine Guidance Notes relating to Crew Agreements.  We do not propose to reproduce those here.  Suffice it to say that there is considerable obligation on the shipping industry in respect of its dealings with ship’s crews.  We were also referred to Customs Notice 744 of 1984, which is no longer extant, as well as Notice 744C of 1997, which is.  That Notice, where relevant, provides as follows:

12.	Ship Managers and Port Agents

…

12.2	How should ancillary services provided by a ship’s manager be treated?

Ancillary services provided by ships’ manager for which a specific fee is charged are treated as follows:

•	Seeking and negotiating employment for ships

this follows the liability of the service being provided

•	Provision of crews

The supply of a crew for a qualifying ship is zero-rated.  This includes the supply of maintaining a sufficient reserve of crew.  A charge is often raised for such a supply when a proportion of pooled management costs are attributed to a ship.

…

12.3	How should I treat the composite fee I charge for my services as a port agent?

If you provide services as a port agent, which are related to the field of activities in and around a port, you will normally charge a composite fee to cover all the arrangements you make.  Such fees may be zero-rated where your service directly relates to:

•	the handling of ships in a port or outside the UK; or
•	the handling in a port or on land adjacent to a port …

12.4	How should I treat separate supplies?

You must look at the separate supplies individually to determine their treatment.  Before deciding liability, you will first need to consider

•	what is being supplied; 
•	whether you are supplying it as an intermediary or a principal; and
•	the place of supply.

The Respondents’ case

14.	The Respondents in the statement of case rely on section 47(3) of the VATA and state that for the purpose of the supplies in question Hammonds should be treated as falling within it.  They also contend that the supply should not be zero-rated within Schedule 8 of Group 8 item 6(a), in that it is not a `handling service’ which is being supplied at all, but is in fact the onward supply of hotel accommodation or taxis by Hammonds to his client, that cost having been charged by the taxi firm/hotel for a service supplied to the ship’s crew, through Hammonds acting in its own name.  The next paragraph of the statement of case refers to the provision of hotels and taxis for a ship’s crew as not being a zero-rated supply.  

15.	In his skeleton argument Mr Moser takes it as self-evident that the services fall within section 47(3) and submits that unless Hammonds can bring itself within the exception contained in Schedule 8 Group 8 VATA then the appeal must fail. 
 
16.	Mr Moser referred to Customs Notice 744C (1997 and 2005 versions) where at paragraph 12.3 it is explained that port agent’s fees “may be zero-rated where your service directly relate to: handling of ships in a port or outside the UK …” He relies on paragraph 12.4 and submits that it affects three factors: (1) the nature of the supplies (whether for the direct needs of the ship or otherwise); (2) the applicability of section 47(3) VATA to services where the agent is not a mere intermediary, and (3) it also reflects the historical background that, with the advent of the single market in 1993, the place of supply of the services in question in a port was no longer to be treated (as had previously been the case) as being outside the UK, but as being supplied in the UK and thereby liable to UK VAT.

17.	With regard to whether or not the disputed services should be zero-rated, it is submitted on behalf of the Respondents that, since the services supplied by Hammonds do not come within item 6 of Group 8 Schedule 8, it follows that item 10, which relates to “the making of arrangements” for such services, will not apply.  In his skeleton argument Mr Moser continued: “This field is of course governed entirely (emphasis added) by EU law.”  It was the Commissioners’ case that the supplies in question were not relevant to the direct needs of the ship, and under the Sixth Directive it was the navigational needs alone that were relevant.

18.	The Respondents’ primary submission was that, on a plain and ordinary reading of the language of the UK implementing legislation and of the overriding EU provisions, the disputed services were not within the relevant exemption.  The disputed taxi and accommodation services were not “services provided for the handling of ships in a port”; nor were they either “the supply, modification, repair, maintenance, chartering and hiring of sea-going vessels” or the “supply of services to meet the direct needs of sea-going vessels or of their cargos”. 

19.	The Tribunal was referred by Mr Moser to Case C-185/89 Staatssecretaris van Financien v Velker International Oil Co [1991] STC 640; Sociète Internationale de Tèlècommunication Aeronautiques (SITA) v HMCE [2004] STC 950; and Case C-181/04-C-183/04 Elmeka v Ipourgos Ikonomikon [206] All ER (D) 67; for the proposition that any exception to the general rule that services are to be standard-rated must be strictly construed.  For the proposition that to qualify, such services must relate directly to the needs of the vessel and not, for example, to the crew, and the words “directly” must itself be strictly construed, the Tribunal was referred to the case of Sita (supra) at paragraph 17 (citing 348/87 Berkholz v Finanzampt Hamburg-Mitte-Altstadt [1985] ECR 251): “The use of the word `direct’ is a clear prohibition on any extension of the relevant need.”, and to the case of Elmeka (supra) at paragraph 25.  For the proposition that the relevant exemption cannot be extended to previous stages in the supply chain the Tribunal was referred to the cases of Velker (supra) at paragraphs 21-22, and Elmeka (supra) at paragraphs 22-24 which expressly extends the principle to supplies within the meaning of Article 15(8).

20.	In the light of the above it was submitted that overnight accommodation for crew and/or taxi services for crew on their way to and from hotels or hospitals cannot be within the meaning of “services to meet the direct needs of sea-going vessels or of their cargo”.

21.	It was further submitted that the following were relevant considerations:

1.	The services in question meet the direct needs of the crew, rather than the vessel, and are therefore already at one remove from the ambit of the exemption.

2.	Whilst a direct supply of crew members to a vessel can be said to meet “the direct need” of the vessel, ancillary onshore costs as and when the particular need for inland crew transportation arises (such as taxis to hospital) cannot be said to do the same.  It would constitute an impermissible extension of the exemption to a previous stage in the supply chain.

3.	The supply of taxis and hotels in such circumstances is not qualitative different from the appellant, in SITA (supra) providing a telecommunications network.

4.	The disputed services are different in type from certain of the other services supplied by Hammond and referred to in the evidence (such as e.g. the provision of a crane to repair a lifeboat) and do not qualify for zero-rating.

The Appellant’s case

22.	Mr Shelley’s primary submission on behalf of Hammonds was that the disputed items were supplied to the ship owners as part of a composite charge made under item 6 of Group 8 to Schedule 8 to the VATA.  As Hammonds contracted directly as a principal party with the various third party service providers, these items became subsumed into the global charge made by Hammonds to the ship owner, and as such, Hammonds was not supplying its services as intermediary under item 10 Group 8 as a person “making arrangements” but under item 6 of Group 8.  In order to perform its primary function of providing a `ship handling’ service, Hammonds was obliged from time to time to engage a variety of third party service providers.  The disputed third party costs were the ancillary costs which were normally incurred by any port agent and it was contended that it was wrong in principle to differentiate between any of the ancillary third party services, be it that of a taxi company or a marine engineer, or a dock side service.  It was submitted that the hiring of a crane to repair a ship’s lifeboat was no different in principle (as a matter of law) from the hirer of a taxi to repatriate the ship’s pilot or an engineer or a crew member as the case may be.  The activities were supplied to Hammonds and were integrated into the overall service provided to the ship owners.  

23.	It was submitted that it would be wrong to look at the ancillary services in isolation from the totality of the business carried on by Hammonds, Hammonds was not providing a taxi service in its own right, nor acting as a hotelier nor, more specifically, was it an agency for taxis and hotels.  The services were bought in to enable Hammonds to perform its primary activity which was to provide component parts of a ship handling service.  Mr Shelley pointed to the fact that in the statement of case the Commissioners had relied principally on their contention that charges for taxi service and hotel accommodation should be seen as supplies in their own right, which are not altered by the context in which they are supplied, nor by the person to whom they are supplied.  Mr Shelley submitted that the fact that such third party services could be separately enjoyed ignored the fact that they were not separately supplied to the ship owners in any event, nor were they separately enjoyed.  They formed part of a wider service, which could not in many cases be performed without the ancillary services.

24.	Following receipt of the Respondents’ skeleton argument, which was broader than the statement of case, in that in the statement of case it was not pleaded that the crew changes were not part of a ship handling service, nor was the wording of the Sixth Directive said to override the wording of the VATA, Mr Shelley responded as follows.  With regard to the crew changes, it was submitted that a ship could not function without its crew, and the Tribunal was entitled to infer that the ship’s master or ship owner had made a decision as to what a crew requirements were, either on the grounds of commerce, or health and safety or the other regulatory requirements which governed the manning of ships.  The Tribunal was referred to the Marine Guidance Notes (supra).  It was further submitted that it was wrong to make a distinction between a supply of services to the ship owners and a supply of services to the ship’s crew.  It was not the crew who requested a transfer to or from a ship, it was the ship owner, and therefore it was wrong to distinguish in that way.

25.	With regard to the supremacy of the Sixth Directive, whilst it was acknowledged that it was appropriate to apply an interpretative approach which, in accordance with the principle in Marleasing SA v La Commercial Internacional de Alimentacion SA [1990] ECR 4135, presumes that a statute has been enacted in accordance with the Directive, nonetheless that interpretative approach does not entitle the court to step beyond Marleasing and to apply the wording of the Directive in preference to that of the statute.  The Tribunal was referred for this proposition      to the cases of John Grieve (Decision No.20149) and Barclays Bank Plc v HMRC (Decision No. 19302).  

26.	It was submitted in the alternative that, even if it were appropriate to import the words `direct’ and `need’ into the wording of the VATA, the word `direct’ was only to be interpreted in order to identify the final party in the supply chain, namely the party which claimed the benefit of zero-rating.  As such, Hammonds satisfied the `direct’ test because it was Hammonds which was the last party in the supply chain, and therefore it was Hammonds who supplied the `needs’ of the ship owners.

27.	Mr Shelly further submitted that Hammonds zero-rated its supplies because it provided a ship handling service, and to treat ancillary supplies as stand alone agency supplies would narrow the operation of item 10 of Group 8 by restricting zero-rating only to those items which also fell to be independently zero-rated under that Schedule, for example pilotage which is zero-rated under item 7, and repairs which are zero-rated under item 1.

28.	With regard to section 47(3) of VATA, which the Respondents had contended were liable to separate standard rate charges as if they had been, or were deemed to have been recharged by the Appellant, Mr Shelley contended that on a proper analysis of law, it did not act as agent for an undisclosed principal (as alleged), when it engaged a third party taxi driver or hotelier.  It contracted with those parties in its own name, and the supply was to Hammonds. The service providers were engaged by Hammonds in order that Hammonds could better perform its own functions under item 6 of Group 8.  The Tribunal was referred to the case of Redrow Group Plc [1999] UK HL4.  It was further submitted that on a true construction, section 47(3) was merely a deeming provision to permit input tax to be recovered by the end user of a supply who might otherwise have no apparent or obvious right to recover input tax because that end user had no contractual relationship with the initial supplier and no invoice.  In the present case Hammonds did not contract or purport to contract with the third parties as an agent for the ship owners, and a deemed agency could not be implied or imposed.  It was submitted that the Respondents were seeking to subvert  the normal supply rules by imposing a retrospective liability on Hammonds to account for output tax through the exercise of a discretionary power.  Such a retrospective discretion to charge tax was contrary to the principles of  `certainty of taxation’.  The Tribunal referred to a citation from the judgment in Halifax Plc and Others v Commissioners of Customs and Excise Case (C-255/02) 21 February 2006 in which the Court of Justice of the European Communities observed:

“… As the Court has held on numerous occasions, Community legislation must be certain and its application foreseeable by those subject to it … that requirement of legal certainty must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which they pose on them”.

Furthermore, it was submitted that there was no indication that the Commissioners had ever given thought to the discretion which was given them by section 47(3), or that a decision had been made previously to exercise such a discretion.  

Reasons for decision

29.	We accept Mr Shelley’s submission with regard to section 47(3) that in this particular context Hammonds is not acting as an agent within the meaning of the section, it is receiving the services of the hotelier or the taxi service as principal and under straightforward VAT principles to be found in s.24-26 of the VATA it is entitled to treat the VAT as input tax.  With regard also to section 47(3), there is no evidence that the Commissioners regarded themselves as having a discretion, and certainly no evidence that there was any decision ever taken to exercise such a discretion.  It was submitted by Mr Moser that Hammonds should bring an action for judicial review if he were submitting that the discretion was not exercised properly, or it was unclear the way in which such discretion had been exercised.  This is not the case, and the Tribunal does have jurisdiction to consider whether or not the Commissioners did give any thought to exercising the discretion given them by s.47(3).  However, in that we do not consider section 47(3) applies in the circumstances of this case, we do not find it necessary to decide whether or not the Commissioners did either consider that they had a discretion to exercise, or exercise a discretion in this matter.  

30.	We do not accept Mr Moser’s submission that this appeal is governed entirely by EU law.  The first question for us to decide is whether or not the UK legislation is capable of being interpreted in accordance with the directive.  The principles to be applied are those set out by the Tribunal in the case of Grieve (supra) as follows:

“In considering the relevance of the Sixth Directive the legal principles are: (1) that the provisions of a Directive may be relied upon by an individual against the State  where the Directive is unconditional and sufficiently precise and the State has not implemented the Directive (Becker v Finanzampt Münster-Innenstadt (Case C-8/81) [1982] ECR 53; (2) that a Directive is binding on the Member State to which it is addressed and does not of itself impose obligations on an individual; it follows that a national authority may not rely upon a provision of a Directive – whether or not implemented by the Member State – in proceedings against an individual before a national court (Marshall v Southampton & South West Hampshire Area Health Authority (Case C-152/84) [1986] QB 401); and (3) that national courts are required to interpret the national law in the light of the wording and purpose of a Directive in order to achieve the result required by the directive to be given effect in national legislation (Marleasing SA)…”

31.	As in the case of Grieve, Hammonds does not seek to rely upon the provisions of the Sixth Directive, and therefore principle (1) does not apply in this appeal.  Principle (2) means that the Commissioners  may not rely upon the provisions of Article 15(8) of the Sixth Directive but must rely on item 6 of Group 8 Schedule 8 of the VATA.  Principle (3) means that we must interpret item 6 of Group 8 in the light of the wording and purpose of Article 15(8) of the Sixth Directive.  

32.	In the case of Barclays Bank Plc (supra) at paragraph 41 the Tribunal said as follows:

The position where national law is wider in scope than the Directive was considered in Central Life Plc v Customs and Excise Commissioners [2001] STC 38 and Braymist v Wise Finance Company Limited [2002] 2 ALL ER 333.  In Century Life at 43 Jacob J said:

“In the case of an Act regulating the position as between citizen and state, such as a taxing statute … the result of the draftsman’s attempt at “rewrite” rather than “copy out” as a potential effect beyond merely causing confusion and unnecessary complication … in principle the taxpayer could have the better of either form of language.  He can rely upon the exemption in the Sixth Directive (which it was conceded was of direct effect).  But if, by an accident of draftsmanship, the United Kingdom legislation was unintentionally wider, the taxpayer could rely on that.”

In Braymist Arden LJ said at 345b that the national law went further than the Directive but that it would not be appropriate to read down the national law so that it complied with the directive and no more; the court must give effect to the wording used by Parliament. In the present case the wording of the national legislation is clearly wider than that of the Directive and Hammonds is entitled to rely on it.

33.	We do not accept Mr Shelley’s primary submission that the disputed items were supplied to the ship-owners as part of a composite charge, and therefore all supplies by Hammonds are to be treated as zero-rated under item 6 of Group 8 to Schedule 8.  The mere fact that it is evident on any analysis that the supply of a grand piano to a ship cannot come either within item 6 of Group 8 or, even more obviously, within Article 15 of the Sixth Directive shows that the argument is fallacious.  Mr Shelley invited us to consider that the supplies in question, namely taxi and hotel services, are to be considered as meeting the `direct’ needs of the ships in question, and therefore are exempt within the Directive.  We do not accept this submission either.  Whilst the supply of a crew undoubtedly does meet the direct needs of the ship, the taxi and hotel services can only properly be considered as indirect needs.  We then must ask ourselves whether the concept of `handling of ships’, i.e. the wording of item 6 of Group 8, is wider than that of meeting the `direct needs’ of the vessel in question.  In our judgment it is, and therefore two further questions follow: firstly, can the supplies in question be encompassed by the phrase, and, secondly, if so, would such an interpretation came within the wording and purpose of the Sixth Directive?  Whilst we do not accept that everything that Hammonds does on behalf of its clients can be subsumed within item 6 of Group 8 of Schedule 8, nonetheless Hammonds incurred the hotel and taxi expenses in the course of its supply of a crew to the ship owners, and such supply is in our view encompassed by “handling”.  In this case Hammonds did buy in the services of the taxi companies and the hotel as part of its proper function of ship handling; it being obvious that, as Mr Moser conceded, a ship cannot sail without a crew.  It is relevant that the invoice from Harwich taxis where an immigration officer was taken out to a ship was not considered to be a standard rated item, whereas taxis to take crews to hotels are considered to be standard-rated, and therefore the Commissioners cannot properly argue that it is because the supply in question here is one of a taxi service that it is being disallowed. We accept Mr Shelley’s submission that there is no proper distinction in law to be made between these two supplies.  

34.	It is difficult to imagine anything more directly connected to the handling of a ship than the provision of the ship’s crew.  It is also difficult to see what could come within the provision of either the Sixth Directive or item 6 of Group 8 other than matters relating to the crew, given that Article 15 by paragraph 5 exempts the supply, hiring, repair and maintenance of equipment of sea-going vessels, and Group 8 at item 1 zero rates the supply, repair or maintenance of a qualifying ship of the modification or conversion of any such ship.  There is also under item 2a and 2b specific exemptions for parts and equipment, and life jackets, life rafts and similar safety equipment.  The Commissioners zero-rated the supply of a crane to repair the ship’s lifeboat, which of itself could be said to be incidental to the repairing of the lifeboat, rather than being directly the supply of a repair.  Given that the Merchant Shipping Act imposes an obligation on a ship to carry specific officers and seamen, as well as qualified doctors and cooks, with the failure to do so resulting in a conviction and possible detention of the ship, it is evident that the provision of a crew is part of the direct needs of the ship and certainly is relevant to the handling of a ship.  Therefore, just as the crane is necessary to help effect the repairs to a ship, so is the provision of hotel accommodation and taxis necessary to the provision of the ship’s crew in circumstances where a ship is delayed.  We also consider that paragraph 12.2 of Notice 744C of 1997, by allowing the zero-rating of the supply of maintaining a sufficient reserve of crew, implicitly is sanctioning hotel expenses which must be encompassed within the cost of maintaining a crew. The Commissioners’ argument that the crew members could not claim the hotel or taxi expenses themselves is irrelevant, given that crew members would not in any event be VAT-registered.  We do not accept the Commissioners’ argument that the ship-owners themselves would not be entitled to reclaim such costs in circumstances of emergency.  Whilst we accept that all exemptions to VAT must be strictly construed, the ships in question would have been unable to sail without the crew and the crew would not have been available if they had not been accommodated for the duration of the delay, nor have been present at the ship if they had not been transported there, and we consider that the supplies are properly to be zero-rated within item 6 of Group 8 of Schedule 8 of VATA.  The Appellant is entitled to rely on the wider wording of Schedule 8, rather than the wording of Sixth Directive, but in any event, we do not consider that the above analysis is inconsistent with the wording and purpose of the Sixth Directive, which must be that matters essential to allowing a ship to sail are exempted, whereas the supply of matters which are not so central are taxable.

35.	Neither party addressed us on the importance of the wording in Group 8 of “in a port”.  No point was taken on behalf of the Commissioners that because the particular services were provided outside the port this had any relevance.  There was also no evidence as to whether the ships on whose behalf Hammonds had incurred the charges were at the relevant times within the port area but were unable to dock, or were still on the high seas, which in any event the Commissioners have accepted as being subject to UK VAT law.   The crew change over occurs when the ship is in port, and the supply of the crew is necessary to the handling of the ship when it is in port.

36.	This appeal is allowed.  The Respondents to pay the Appellant’s reasonable costs of and incidental to this appeal.  In the absence of agreement the matter to be referred to a costs judge.  

MISS J C GORT
CHAIRMAN

RELEASED: 20 September 2007

LON 2007/0035