C-416/85

Mr President, original Member States of the Community, Members of the Court, nor have they taken the same form, that of a cumulative multi-stage tax. Although 'the rates and exemptions [were] not harmonized at the same time' 5 the result was the establishment of a 'general tax on 7 consumption'. 6 The Sixth Directive, adopted 10 years later, had as its aim an 1. This action against the United Kingdom essential objective, the creation of 'own for failure to fulfil its obligations concerns resources' for the Communities, which were the criteria for the application of Article 28 to include 'those accruing from value-added (2) of the Sixth Council Directive of 17 tax and obtained by applying a common May 1977 on the harmonization of the laws rate of tax on a basis of assessment of the Member States relating to turnover determined in a uniform manner according to taxes (77/388). 1 The essence of the claim is Community rules'. 8 that the United Kingdom applies to a number of goods and services a 'zero rate' which is not justified for 'clearly defined social reasons and for the benefit of the final consumer', as required by the last indent of Article 17 of the Second Council Directive of 11 April 1967, 2 to which Article 28 (2) of the Sixth Directive refers. 3. 'So that the Communities' own resources may be collected in a uniform manner in all the Member States' 9Articles 13 to 16 of the directive lay down a list of exemptions common to all the Member States. However, on a transitional basis Article 28 of the directive allows them to retain, under 2. That provision was adopted as part of a certain conditions, inter alia the reduced process initiated in 1967, when the first two rates and exemptions which were in force directives on the harmonization of legis­ on 31 December 1975 and satisfy the lation concerning turnover taxes 3 were criteria set out in the last indent of Article adopted; it should be noted that in the 17 of the Second Directive (hereinafter United Kingdom these taxes have never referred to as 'Article 17'). That possibility been as important as they were in the was left open on the ground that it was 'vital to provide for a transitional period to * Translated from the French. 1 — 'Common system of value-added tax: uniform basis of assessment', OJ L 145, 13.6.1977, p. 1. 4 — J. C. Scholsem, 'La TVA, impôt européen' in Mélanges 2 — Directive 67/228 — 'Structure and procedures for Fernand Dehousse, Vol. II, p. 305. application of the common system of value-added tax' 5 — Eighth recital in the preamble to the First Directive. (hereinafter referred to as VAT). Official Journal, English Special Edition 1967, p. 16, hereinafter referred to as 'the 6 — Article 2 (1) of the First Directive. Second Directive'. 7 — The third, fourth and fifth directives merely delayed the 3 — First Council Directive of 11 April 1967 on the harmon­ introduction of the common VAT system. ization of legislation of Member States concerning turnover 8 — Second recital in the preamble to the directive; my taxes (67/227), Official Journal, English Special Edition emphasis. 1967, p. 14; Second Directive, cited above. 9 — Eleventh recital in the preamble to the directive.

allow national laws in specified fields to be and services 11 in the list contained in the gradually adapted'. 10 Value-added Tax Act 1983. It considers that those provisions do not comply with the criteria laid down in Article 17. While it admits that zero-rating has no effect on own resources, it states that 'in the context of the completion of the internal market, of the abolition of fiscal frontiers and of the 4. Although it was adopted on the basis of drive towards a standardization of the rate Article 28 (2), the system of zero-rating at of VAT ... ' its aim is to 'limit the use of issue differs from the exemption mechanism zero rates to those transactions which meet provided for in that article. That is to say, the criteria laid down in Article 28 (2) of Article 28 provides for exemption 'with the Sixth Directive and this as part of its refund of the tax paid at the preceding overall fiscal policy of working towards the stage' which takes effect at the retail stage. total phasing out of all zero rates or At earlier stages every taxable person as exemptions with refunds.' defined in Article 4 of the directive must apply the tax. Only a retailer who sells an exempted product to a 'final consumer' does not pass on the VAT which he has paid but obtains a refund from the . tax authorities. The zero-rating system takes a different 6. According to the Commission, in deter­ approach. A list of goods and services mining how far up the commercial chain designated by the national legislature is zero-rating may be applied if it is to benefit subject to purely notional taxation, under the final consumer, only stages corre­ which no VAT is actually charged either on sponding to 'bona fide inputs' in the delivery or at earlier stages in the marketing production or distribution of a final product chain. Naturally, there is nothing to refund which may be exempted in accordance with to the retailer. According to the the criteria laid down in Article 28 (2) may Commission, some 35 % of the private be taken into account. The Commission consumption of households is zero-rated in further argues that only the person who the United Kingdom and 33 % in Ireland; acquires the goods or services without Ireland disputes that percentage and states having any right of deduction may be that the real figure is 25 %. The zero-rating regarded as the final consumer. technique exists in three other States, but they operate it only on a very small scale, largely in favour of the press.

it is not necessary that it should 'only' be such a proposal was submitted while these the final consumer who benefits, or that he proceedings were in progress. 1 should benefit directly. It is sufficient if he gains an indirect benefit from the trans­ action, in particular by way of a lower end 9. Let me say right away that these price. The United Kingdom points out that objections concerning the Commission's it enjoys considerable discretion in deter­ possible motives for bringing the action do mining its own social policies and hence in not seem relevant to the role of the Court. deciding on the national measures to be It scarcely needs pointing out that the taken for 'clearly defined social reasons'. decision whether or not to bring an action The Commission does not deny that such a against a Member State for failure to fulfil prerogative exists, but it submits that the its obligations is in any event in the entire Court, exercising its supervisory power, discretion of the Commission, as the should hold that in this case those measures custodian of the Treaties, and that it is for are unjustified or disproportionate in the Commission 'to judge at what time it relation to the social reasons relied on, and shall bring an action before the Court'. 1 3

COMMISSION v UNITED KINGDOM

duties of a Community institution. The objective of the measures in question, the action will be decided according to the other its beneficiaries. They are therefore relevant provisions, namely those of the cumulative. Moreover, a provision creating Treaty establishing the European Economic an exception to the rules on the uniform Community of 25 March 1957. It is pros­ basis of assessment for VAT cannot be ecuted in the interests of the Community construed liberally. and its legal system for the purpose of obtaining a binding ruling on the scope of 1 the rights and obligations of the parties'. 5 A — 'Clearly defined social reasons'

'In principle, it is for each Member State to 10. Let me emphasize right away that determine in accordance with its own scale 'clearly defined social reasons' and 'benefit of values and in the form selected by it the of the final consumer' are not alternative requirements of public morality in its conditions. One of them concerns the 16 territory'. 15 — Opinion of Mr Advocate General Lenz delivered on 7 February 1985 in Case 13/83, cited above, [1985] ECR 16 — Judgment of 14 December 1979 in Case 34/79 Regina v 1515, at p. 1518. Henn and Darby [1979] ECR 3795.

OPINION OF MR DARMON — CASE 415/85

I propose that the Court take the same ignored in the case of a zero rate. In such a approach in this case. That is to say, if it is case the final consumer is the person who accepted that the Member States can restrict would have to bear a positive tax and would that fundamental freedom in the manner not be able to deduct it. That definition is described, it must be possible to accord not, I think, based on a narrow approach; it them, without thereby endangering to any corresponds strictly to a fiscal interpre­ greater extent the consistency of the tation, the only one which, in the context of Community legal system, a similar latitude provisions on VAT, is appropriate to the with regard to provisional exceptions to categories relevant to such taxation. It is, rules establishing a uniform basis of moreover, that which appears in Article 3 of 18 assessment for VAT. the proposal for a 16th VAT directive:

14. In my view the final consumer must be defined as the person who acquires goods (2) a taxable person who was not or services for his personal use, as opposed entitled to deduct value-added tax to an economic activity, which Article 4 of when purchasing goods.' the directive uses as the criterion for deter­ mining who is a taxable person. The distinction between a taxable person and a final consumer lies in the fact that a taxable C — 'For the benefit' of the final consumer: person carries out transactions for the concept of a benefit consideration, while a final consumer is one who acquires goods or services for his own use. That distinction has fundamental consequences for tax purposes: in principle 15. It remains for me to consider the a taxable person deducts VAT, whereas a concept of a 'benefit' as used in Article 17, final consumer must bear that tax 'unless where it speaks of exemptions 'for the there is a further transaction in which a 17 benefit of the final consumer'. In the case of price is paid'. That consequence cannot be a 'normal' exemption, such a benefit results from the non-application of VAT at the 17 — Judgment of 1 April 1982 in Case 89/81 Staatssecretaris van Financiën v Hong Kong Trade Development Council [1982] ECR 1277, at paragraph 9. 18 — OJC 226,28.8.1984, p. 2

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retail stage. In essence, the benefit is entirely principle, the zero-rating of inputs which identical under the zero-rating system: the are directly and exclusively used in a consumer pays no VAT. The application of product which itself is properly zero-rated. zero-rating at earlier stages of distribution results in no additional fiscal benefit for the consumer since he does not pay the tax in any event. However, as the Commission says, zero-rating may be accepted higher in 17. Now that the conditions laid down in the commercial chain in so far as it is the provision at issue have been defined, we applied to the product itself which is may determine whether or not the contested zero-rated on purchase by the final measures comply with them. consumer.

OPINION OF MR DARMON — CASE 415/85

ignored. It should be observed that all the consumers — should not present any supplies referred to contribute directly and difficulty. exclusively to the production of food for the final consumer. Moreover, persons using such supplies to produce their own food and farmers keeping part of their production for the use of their family receive a direct 21. With regard to the supply of water, benefit from the application of the zero only supplies to industry are in dispute; rates at issue. I therefore propose that the while the United Kingdom admits that the Court hold that the United Kingdom has industrial sector is the largest consumer, it not failed to fulfil its obligations in this argues that in certain cases water is used respect. principally for the benefit of the individual in the preparation of food and drink. In its view there is, moreover, no practical reason for attempting to identify the status of the final consumer, since water is connected in the public mind with food and should be treated in the same way by analogy. B — Group 2 — Sewerage services and water supplies

COMMISSION v UNITED KINGDOM

C — Group 6 — News services E — Group 8 — Construction of buildings, etc.

25. This is certainly the most important group of exemptions from the economic 23. Since the Commission has accepted that point of view since it covers the housing zero rates may be applied in respect of the sector, industrial and commercial buildings, supply of information directly to the public and the community and civil engineering or to undertakings which use that infor­ sector. The Commission considers that the mation in the production of products such failure to distinguish according to the type as newspapers, it seems that it is only the of housing concerned is disproportionate application of zero rates to the supply of having regard to the objectives pursued. The information — essentially by electronic United Kingdom argues that it is very means — for other business uses that difficult to distinguish, as the Commission remains at issue. Such beneficiaries of zero- suggests, between housing constructed by rating (banks, insurance companies, etc.) local authorities, which unquestionably cannot be regarded as final consumers. qualify for exemption, and other housing, especially since it is now the private sector which, because of the steps taken to encourage home ownership, provides an increasing proportion of housing for the most disadvantaged segments of the community. D — Group 7 — Fuel and power

structure and construction, especially from respect by the relevant provision, and allow the point of view of employment. I do not any exemption based on social reasons. share the Commission's reservations with regard to the social reasons put forward. 28. With regard to community works and The improvement of industrial infra­ civil engineering, I am inclined, for reasons structure, the development of residential similar to those I have just set out, to adopt areas and, above all, the quantitative and the same approach. Here again, despite the qualitative effects of such development for social aspect of the reasons put forward, it employment are clearly important social is hard to see any distinction between the reasons. However, I must propose that the final consumer and the population as a Court hold that the United Kingdom has whole. failed to fulfil its obligations in so far as the F —Group 17— Clothing and footwear zero rates at issue, although undoubtedly benefiting workers, users and citizens, 29. The zero-rating of purchases of such cannot be regarded as benefiting the final supplies by employers is said to be justified consumer as defined in the directive. To by the fear that taxation would discourage treat the entire population as the final them from providing such equipment for consumer does not seem to me to be their staff. I need simply point out that the compatible with a provision which clearly beneficiary cannot be regarded as a final concerns a person who acquires goods or consumer according to the definition I have services for his own use. Moreover, such a adopted. It may be added that it appears wide interpretation of the term 'final from the United Kingdom's pleadings them­ consumer' would amount to the de facto selves that many employers should be able removal of the condition laid down in that to recover the tax on such supplies.

to supplies of fuel and power and of protective boots and helmets in so far as they are not supplied to the final consumer,

the United Kingdom has failed to fulfil its obligations under the EEC Treaty and under Article 28 (2) of the Sixth Council Directive of 17 May 1977 (77/388);

(2) dismiss the remainder of the application;

(3) order the United Kingdom to pay the costs.