C-305/16 Avon Cosmetics

JUDGMENT OF THE COURT (Third Chamber)

14 December 2017 ( *1 )

(Reference for a preliminary ruling — Value added tax (VAT) — Sixth Directive 77/388/EEC — Article 11A(1)(a) — Taxable amount — Article 17 — Right to deduct — Article 27 — Special derogating measures — Decision 89/534/EEC — Marketing structure based on the supply of goods through non-taxable persons — Taxation on the open market value of the goods as determined at the final stage of the marketing chain — Inclusion of the costs incurred by those persons)

In Case C‑305/16,

REQUEST for a preliminary ruling under Article 267 TFEU from the First-tier Tribunal (Tax Chamber) (United Kingdom), made by decision of 25 May 2016, received at the Court on 30 May 2016, in the proceedings

Avon Cosmetics Ltd

v

Commissioners for Her Majesty’s Revenue and Customs,

THE COURT (Third Chamber),

composed of L. Bay Larsen, President of the Chamber, J. Malenovský, M. Safjan, D. Šváby and M. Vilaras (Rapporteur), Judges,

Advocate General: M. Bobek,

Registrar: L. Hewlett, Principal Administrator,

having regard to the written procedure and further to the hearing on 31 May 2017,

after considering the observations submitted on behalf of:

Avon Cosmetics Ltd, by D. Scorey QC and R. Cordara QC, instructed by A. Cook, I. Hyde and S.P. Porter, Solicitors,

the United Kingdom Government, by J. Kraehling, G. Brown and D. Robertson, acting as Agents, and M. Hall QC,

the Council of the European Union, by J. Bauerschmidt, E. Moro and E. Chatziioakeimidou, acting as Agents,

the European Commission, by L. Lozano Palacios, R. Lyal and A. Lewis, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 7 September 2017,

gives the following

Judgment

Legal context and the dispute

1This request for a preliminary ruling concerns (i) the interpretation of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1), as amended by Council Directive 2004/7/EC of 20 January 2004 (OJ 2004 L 27, p. 44) (‘the Sixth Directive’), and of the principles governing it, in the light of the derogation granted by Council Decision 89/534/EEC of 24 May 1989 authorising the United Kingdom to apply, in respect of certain supplies to unregistered resellers, a measure derogating from Article 11A(1)(a) of the Sixth Directive (OJ 1989 L 280, p. 54), and (ii) the validity of that decision.

2The request has been made in proceedings between Avon Cosmetics Ltd (‘Avon’) and the Commissioners for Her Majesty’s Revenue and Customs (United Kingdom) (‘the Commissioners’) concerning, in particular, failure to take account of certain costs incurred by non-taxable resellers for the purpose of determining the taxable amount for the value added tax (VAT) payable by Avon pursuant to Decision 89/534.

Legal context

EU law

3The Sixth Directive was repealed and replaced, from 1 January 2007, by Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1).

4Article 2 of the Sixth Directive provided:

‘The following shall be subject to [VAT]:

1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;

...’

5Article 4(1) of the Sixth Directive provided:

‘“Taxable person” shall 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.’

6Article 11 of the Sixth Directive stated:

‘A. Within the territory of the country

1. The taxable amount shall be:

in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies;

...’

7Article 17 of the Sixth Directive, headed ‘Origin and scope of the right to deduct’, provided:

‘1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

[VAT] due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

…’

8Article 27 of the Sixth Directive was worded as follows:

‘1. The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the overall amount of the tax revenue of the Member State collected at the stage of final consumption.

2. A Member State wishing to introduce the measure referred to in paragraph 1 shall send an application to the Commission and provide it with all the necessary information. ...

...’

9The second to fifth and ninth and tenth recitals of Decision 89/534 state:

‘… the United Kingdom was authorised by … Decision 85/369…, deemed to have been adopted on 13 June 1985, in accordance with the procedure laid down by Article 27(4) of the Sixth Directive, to introduce for a two-year period a derogation from the Sixth Directive to combat tax avoidance;

… certain marketing structures based on sales of goods effected by taxable persons to non-taxable persons with a view to their resale at the retail stage result in avoidance of tax at the stage of final consumption;

… in order to prevent such tax avoidance, the United Kingdom applies a measure permitting the tax authorities to adopt administrative decisions the effect of which is to tax supplies made by the taxable persons operating such marketing structures on the basis of the open market value of the goods at the retail stage;

… that measure constitutes a derogation from Article 11A(1)(a) of the Sixth Directive, which stipulates that, within the territory of the country, the taxable amount in respect of supplies of goods is everything which constitutes the consideration which has been, or is to be, obtained by the supplier from the purchaser or a third party for such supplies;

...

… in its judgment of 12 July 1988, [Direct Cosmetics and Laughtons Photographs (138/86 and 139/86, EU:C:1988:383),] the Court of Justice ruled inter alia that Article 27 of the Sixth Directive permitted the adoption of a derogating measure such as that at issue on condition that the resultant difference in treatment was justified by objective circumstances;

… in order to satisfy itself that this condition is met, the Commission must be informed of any administrative decisions adopted by the tax authorities in connection with the derogation in question;

…’

10Article 1 of Decision 89/534 provides:

‘By way of derogation from Article 11A(1)(a) of the Sixth Directive, the United Kingdom is hereby authorised to prescribe, in cases where a marketing structure based on the supply of goods through non-taxable persons results in non-taxation at the stage of final consumption, that the taxable amount for supplies to such persons is to be the open market value of the goods as determined at that stage.’

United Kingdom law

11Section 1(1) of the Value Added Tax Act 1994 (‘the 1994 Act’) provides:

‘[VAT] shall be charged, in accordance with the provisions of this Act—

on the supply of goods or services in the United Kingdom ...’

12Section 4(1) of the 1994 Act states:

‘VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

...’

13As provided in section 19(2) of the 1994 Act:

‘If the supply is for a consideration in money its value shall be taken to be such amount as, with the addition of the VAT chargeable, is equal to the consideration.

...’

14Paragraph 2 of Schedule 6 of the 1994 Act provides:

‘Where—

the whole or part of a business carried on by a taxable person consists in supplying to a number of persons goods to be sold, whether by them or others, by retail, and

those persons are not taxable persons,

the Commissioners may by notice in writing to the taxable person direct that the value of any such supply by him after the giving of the notice or after such later date as may be specified in the notice shall be taken to be its open market value on a sale by retail.’

15On the basis of the derogation referred to in the previous paragraph, the Commissioners sent Avon a written notice (Notice of Direction) (‘the individual notice’), which was worded as follows:

‘In pursuance of [paragraph 2 of Schedule 6 of the 1994 Act], the [Commissioners] hereby direct that after 1 July 1985 the value by reference to which [VAT] is charged on any taxable supply of goods:

by you to persons who are not taxable persons ...

to be sold, whether by persons mentioned in (a) above or others, by retail,

shall be taken to be its open market value on a sale by retail.’

The dispute in the main proceedings and the questions referred for a preliminary ruling

16Avon is engaged in the manufacture and sale of products, mostly cosmetics. Their retail sale is carried out through independent female representatives (‘representatives’), almost all of whom operating in the United Kingdom are not subject to VAT, as they are not registered for VAT and their turnover is not sufficient to make it compulsory for them to be subject to it.

17Avon’s sales to those representatives are at a price below the retail price envisaged by it and are subject to VAT. On the other hand, as the representatives are not accountable for VAT, the retail sales which they make are not subject to VAT.

18The effect of that system is that the difference between the retail selling price and the price paid by the representatives to Avon is not subject to VAT.

19To remedy that situation, the United Kingdom, in particular by the Finance Act 1977, granted the Commissioners the power to issue persons liable to pay VAT with directions so that the tax payable by them would be calculated by reference to the retail selling price.

20In accordance with Article 27(5) of the Sixth Directive, the United Kingdom notified the Commission of the European Communities of that measure, as a special derogating measure, within the meaning of Article 27(1), which it intended to retain after the Sixth Directive entered into force on 1 January 1978.

21By Council Decision 85/369/EEC of 13 June 1985, entitled ‘Application of Article 27 of the Sixth Council Directive of 17 May 1977 on [VAT] (Authorisation of a derogation requested by the United Kingdom to enable certain types of tax avoidance to be prevented)’ (OJ 1985 L 199, p. 60, and corrigendum at OJ 1987 L 93, p. 17), the derogation was authorised for a period of two years, subsequently extended by a further two years.

22When requests were made to the Court for a preliminary ruling relating to the implementation of the derogation authorised by Decision 85/369, it found no factors of such a kind as to affect the validity of that decision (judgment of 12 July 1988, Direct Cosmetics and Laughtons Photographs, 138/86 and 139/86, EU:C:1988:383).

23By Decision 89/534, the Council extended the authorisation given to the United Kingdom to derogate from Article 11A(1)(a) of the Sixth Directive with the aim of avoiding non-taxation at the stage of final consumption.

24Under paragraph 2 of Schedule 6 of the 1994 Act, adopted on the basis of that decision, and the individual notice, Avon’s taxable amount for VAT purposes corresponds to the sale value at the stage of final consumption of the goods supplied by it to non-taxable persons. In other words, under that system the VAT on the products sold by Avon to the representatives is calculated on the basis not of the price excluding tax at which Avon sells them those products, but of the price at which the representatives are deemed to resell them to their customers, that excess VAT being borne by Avon. However, in practice the Commissioners make two adjustments to that calculation in order to take account of the fact that some products are purchased by non-taxable representatives for their personal use and that the latter sell some products at a discount.

25Avon brought proceedings before the referring tribunal for the refund of overpaid VAT totalling in the region of GBP 14 million (approximately EUR 15792000) on the ground that the system of taxation which is applicable to it, on the basis of the individual notice, does not take into account the tax relating to the cost of the representatives’ purchase of demonstration items, which are intended to help them to increase their sale volumes and are sold to them by it at a discount greater than that applied to the other products. According to Avon, as purchases of the demonstration items amount to business expenditure, the VAT relating to those purchases would have been deductible by those representatives if they had possessed the status of taxable person.

26Consequently, the individual notice is said to go beyond what is necessary in order to achieve the objective pursued and involves the overpayment of VAT because of the absence of an adjustment to take account of the VAT incurred by the representatives on the purchase of demonstration items. There is thus a breach of the principles of proportionality, equal treatment and fiscal neutrality, and also a competitive disadvantage between Avon and economic operators using traditional selling methods, who do not bear that VAT burden.

27Avon also submits that, in its application to the Commission for a derogation, the United Kingdom failed to provide all relevant information for the purposes of Article 27(2) of the Sixth Directive, although the problem of disparity of treatment regarding VAT applicable to demonstration items was already known. Accordingly, the purpose of its claim before the referring tribunal is that the VAT payable should be adjusted to take account of the VAT applicable to those demonstration items or, in the alternative, that Decision 89/534, paragraph 2 of Schedule 6 of the 1994 Act and the individual notice should be declared invalid.

28The Commissioners note that that provision is intended to prevent a loss of revenue on sales which escape VAT on their retail price. They take the view that the failure to take account of the VAT paid by the representatives in respect of the purchase of the demonstration items does not offend against the principles of proportionality, equal treatment and neutrality and does not create a distortion of competition, since Avon has chosen an operating structure and an approach to the market that are different from those of traditional retailers and Avon and those retailers operate in different markets, even though the products sold are similar. Those circumstances justify a different tax treatment.

29Furthermore, in the Commissioners’ submission, the calculation and levying of VAT should not be complicated unnecessarily for taxpayers or tax authorities. Acceptance of Avon’s arguments would make the non-taxable representatives bear a significant administrative burden.

30The Commissioners contend that they cannot interpret paragraph 2 of Schedule 6 of the 1994 Act as meaning that Avon might deduct the VAT paid by the representatives in respect of the purchase of the demonstration items without going beyond the authorisation given by the Council, its own legislation and the principle that an exception to the normal VAT mechanism must be interpreted narrowly.

31By interlocutory decision of 19 February 2014, the referring tribunal held that the terms in which Decision 89/534 is couched, reproduced in paragraph 2 of Schedule 6 of the 1994 Act, do not permit account to be taken of the tax paid by the representatives in respect of the purchase of the demonstration items, thereby giving rise to ‘sticking’ tax, that is to say, input tax paid that cannot be recovered. It inferred from this that that provision creates unfair competition between Avon and entities which sell through taxable retailers. Therefore, paragraph 2 of Schedule 6 of the 1994 Act goes further than is necessary in order to achieve its objective of preventing any tax avoidance.

32Since the referring tribunal takes the view that that provision reproduces the terms of Decision 89/534 and has doubts as to the validity of that decision in the light in particular of the principle of fiscal neutrality, it considers it appropriate to make a reference to the Court in that regard.

33It is in those circumstances that the First-tier Tribunal (Tax Chamber) decided to stay proceedings and to refer the following questions to the Court for a preliminary ruling:

Where a direct seller sells goods (“Sales Aids”) to unregistered resellers or the unregistered reseller purchases goods and services from third parties (“Third Party Goods and Services”) which are in both cases used by the unregistered resellers to assist their economic activity of selling other goods which are also purchased from the direct seller and the subject of administrative arrangements issued pursuant to a derogation most recently authorised by … Decision [89/534] …, do the relevant authorisations, implementing legislation and/or administrative arrangements offend any relevant provisions and/or principles of European Union law in so far as they require the direct seller to account for output tax on the unregistered resellers’ sale price of the other goods with no reduction for the VAT incurred by the unregistered reseller on such Sales Aids and/or Third Party Goods and Services?

Whether the [United Kingdom] was under any obligation to inform the Commission when seeking authorisation from the Council for the derogation [referred to in paragraph 2 of Schedule 6 of the 1994 Act], that unregistered resellers incurred VAT on purchases of Sales Aids and/or Third Party Goods and Services used for the purposes of their economic activities and that, accordingly, an adjustment to reflect that irrecoverable input tax, or overpaid output tax, should be accommodated in the derogation.

In the event that the answer to questions 1 and/or 2 above is in the affirmative:

Whether any of the relevant authorisations, implementing legislation or administrative arrangements can and should be interpreted so as to make an allowance in respect of either (i) irrecoverable VAT on Sales Aids or Third Party Goods and Services borne by unregistered resellers and used by such unregistered resellers for the purposes of their economic activities; or (ii) VAT in excess of the tax avoided being collected by [the Commissioners] or (iii) the potential unfair competition that arises between direct sellers, their unregistered resellers and non-direct selling businesses.

Whether

the authorisation of the [United Kingdom]’s derogation from Article 11A(1)(a) of the Sixth Directive was unlawful;

a derogation from Article 17 of the Sixth Directive is necessary alongside the derogation from Article 11A(1)(a) [referred to in paragraph 2 of Schedule 6 of the 1994 Act]. If so, whether the [United Kingdom] acted unlawfully by failing to ask the Commission or the Council to authorise it to derogate from Article 17;

the [United Kingdom is] acting unlawfully by failing to administer VAT in such a way as to allow direct sellers to claim a credit for either Sales Aids or Third Party Goods and Services VAT incurred by unregistered resellers for the purposes of their economic activities;

all or any part of the relevant authorisations, implementing legislation or administrative arrangements are therefore invalid and/or unlawful.

Whether the appropriate remedy is, from the Court of Justice … or from the national Tribunal or Court:

a direction that the Member State is required to give effect to the derogation [referred to in paragraph 2 of Schedule 6 of the 1994 Act] in domestic law by providing for an appropriate adjustment for any of (a) irrecoverable VAT on Sales Aids or Third Party Goods and Services borne by unregistered resellers and used by such unregistered resellers for the purposes of their economic activities; or (b) VAT in excess of the tax avoided being collected by [the Commissioners]; or (iii) the potential unfair competition that arises between direct sellers, their unregistered resellers and non-direct selling businesses; or

a declaration that the authorisation of the derogation [referred to in paragraph 2 of Schedule 6 of the 1994 Act], and by extension the derogation itself, is invalid; or

a declaration that the domestic legislation is invalid; or

a declaration that the [individual notice] is invalid; or

a declaration that the [United Kingdom] is obliged to apply for authorisation for a further derogation so [as] to provide for an appropriate adjustment for any of (a) irrecoverable VAT on Sales Aids or Third Party Goods and Services borne by unregistered resellers and used by such unregistered resellers for the purposes of their economic activities; or (b) VAT in excess of the tax avoided being collected by [the Commissioners]; or [(c)] the potential unfair competition that arises between direct sellers, their unregistered resellers and non-direct selling businesses.

Under Article 27 of the Sixth Directive (Article 395 of … Directive [2006/112]), is the “tax eva[ded] or avoid[ed]” to be measured as the net loss of tax (taking account of both the output tax paid and input tax recoverable in the structure giving rise to the tax evaded or avoided) to the Member State or the gross loss of tax (taking account of only the output tax in the structure giving rise to the tax evaded or avoided) to the Member State?’

Consideration of the questions referred

The first question

34By its first question, the referring tribunal asks, in essence, (i) whether Articles 17 and 27 of the Sixth Directive must be interpreted as precluding a measure, such as that at issue in the main proceedings, authorised by Decision 89/534 pursuant to Article 27 of that directive, which derogates from Article 11A(1)(a) of that directive and under which the taxable amount for VAT purposes of a direct sales company is the open market value of the goods sold at the stage of final consumption, where those goods are marketed through resellers not subject to VAT, without account being taken, in one way or another, of the input VAT relating to demonstration items purchased by those resellers from that company, and (ii), whether Decision 89/534 is invalid on the ground that it does not permit the United Kingdom to take account of the input VAT paid by such resellers relating to those demonstration items, so that it infringes the principles of proportionality and fiscal neutrality.

35As regards in particular the interpretation of Articles 17 and 27 of the Sixth Directive, it should be stated at the outset that, in accordance with Decision 89/534, the derogation granted to the United Kingdom pursuant to Article 27 of the Sixth Directive and taking the form, in United Kingdom legislation, of paragraph 2 of Schedule 6 of the 1994 Act, is intended to prevent tax avoidance.

36As the Court has already held, national derogating measures designed to prevent the evasion or avoidance of tax must be interpreted strictly and may not derogate from the basis for charging VAT laid down in Article 11 of the Sixth Directive, except within the limits strictly necessary for achieving that aim (judgments of 10 April 1984, Commission v Belgium, 324/82, EU:C:1984:152, paragraph 29, and of 29 May 1997, Skripalle, C‑63/96, EU:C:1997:263, paragraph 24).

37According to the fundamental principle which underlies the VAT system, and which follows from Article 2 of the Sixth Directive, VAT applies to each transaction by way of production or distribution after deduction has been made of the VAT which has been levied directly on transactions relating to inputs; the right to deduct is an integral part of the VAT scheme and in principle may not be limited (see, to that effect, judgments of 6 July 1995, BP Supergas, C‑62/93, EU:C:1995:223, paragraphs 16 and 18, and of 19 September 2000, Ampafrance and Sanofi, C‑177/99 and C‑181/99, EU:C:2000:470, paragraph 34).

38In the present instance, in accordance with Article 1 of Decision 89/534 and in terms similar thereto, paragraph 2 of Schedule 6 of the 1994 Act derogates from Article 11A(1)(a) of the Sixth Directive, by authorising the Commissioners to determine the taxable amount of a person taxable for VAT purposes, in respect of products which he supplies to non-taxable resellers, by reference to those products’ open market value on a sale by retail. It follows that, in a situation such as that in the main proceedings, the taxable person for VAT purposes is, in a way, taxed instead of the non-taxable resellers.

39The derogating measure authorised by Decision 89/534 does not, however, relate to the rules governing the right to deduct, which are set out in Articles 17 to 20 of the Sixth Directive, and which therefore remain applicable in the present instance.

40More specifically, it does not permit derogation from Article 17(2) of the Sixth Directive, according to which the taxable person is to be entitled to deduct, from the tax which he is liable to pay, VAT due or paid in respect of goods or services supplied or to be supplied to him by another taxable person.

41Under that provision, the tax relating to demonstration items or other goods and services purchased by resellers, whether or not they are subject to VAT, cannot be deducted from the tax payable by a direct sales company, such as Avon in the main proceedings, which has not purchased any goods or services from third parties but which, on the contrary, in the case of the demonstration items, has sold them to those resellers.

42Furthermore, the representatives at issue in the main proceedings, who sell products within the framework of a direct selling system, are not subject to VAT and, accordingly, they are not entitled by virtue of Article 17(2) of the Sixth Directive to recover all or part of the tax which they are charged by their suppliers of goods and services.

43It follows from the foregoing considerations that it should be stated in answer to the first question that Articles 17 and 27 of the Sixth Directive must be interpreted as not precluding a measure, such as that at issue in the main proceedings, authorised by Decision 89/534 pursuant to Article 27 of that directive, which derogates from Article 11A(1)(a) of that directive and under which the taxable amount for VAT purposes of a direct sales company is the open market value of the goods sold at the stage of final consumption, where those goods are marketed through resellers not subject to VAT, even if that derogating measure does not take account, in one way or another, of the input VAT relating to demonstration items purchased by those resellers from that company.

44As regards the validity of Decision 89/534, first, it should be noted that, in order for an EU measure relating to the VAT system to be compatible with the principle of proportionality, the provisions which it contains must be considered to be appropriate and necessary for the attainment of the objectives which it pursues and to be such as to affect as little as possible the objectives and principles of the Sixth Directive (see, to that effect, judgments of 19 September 2000, Ampafrance and Sanofi, C‑177/99 and C‑181/99, EU:C:2000:470, paragraph 60, and of 29 April 2004, Sudholz, C‑17/01, EU:C:2004:242, paragraph 46).

45In the present instance, the derogating measure in Decision 89/534 pursues, in accordance with the second to fourth recitals of that decision, the objective of preventing tax avoidance and is intended to enable the United Kingdom to remedy certain specific problems caused by the direct selling system so far as concerns VAT. As there are non-taxable resellers at the final stage of the marketing chain, the consequence of that system is that the supplies by those resellers to the final consumer are not subject to VAT.

46The Court has held that the concept of ‘tax avoidance’, within the meaning of Article 27(1) of the Sixth Directive, corresponds to a purely objective phenomenon and that that provision permits the adoption of a measure derogating from the basic rule set out in Article 11A(1)(a) of that directive even where the taxable person carries on business not with any intention of obtaining a tax advantage but for commercial reasons (see, to that effect, judgment of 12 July 1988, Direct Cosmetics and Laughtons Photographs, 138/86 and 139/86, EU:C:1988:383, paragraphs 21 and 24).

47Inasmuch as the derogating measure in Decision 89/534 authorises the United Kingdom to charge VAT on sales of a direct sales company’s products to final consumers made by non-taxable resellers, by determining the taxable amount of that company in the light of the open market value of the goods sold by those resellers, it enables the loss of tax revenue resulting from such a marketing structure to be avoided. Such a measure therefore appears appropriate for attaining the objective of combating tax avoidance.

48It is true that Decision 89/534 does not permit account to be taken, in one way or another, of the input VAT relating to demonstration items purchased by non-taxable resellers from a direct sales company.

49However, as is apparent from paragraphs 40 and 41 of the present judgment, taking account of that input VAT in the taxable amount of the supplies referred to in Article 1 of Decision 89/534 would amount to an unauthorised derogation from Article 17(2) of the Sixth Directive.

50Furthermore, taking account of that input VAT in the taxable amount would complicate the levying of VAT in the case of the marketing structures covered by that decision.

51Consequently, it must be held that Decision 89/534 does not go beyond what is necessary in order to attain the objective of combating tax avoidance.

52Secondly, it should be recalled that the principle of fiscal neutrality precludes, in particular, treating similar goods or supplies of services, which are thus in competition with each other, differently for VAT purposes (judgment of 10 November 2011, The Rank Group, C‑259/10 and C‑260/10, EU:C:2011:719, paragraph 32 and the case-law cited).

53The failure of Decision 89/534 to take account of the input VAT relating to demonstration items purchased by non-taxable resellers from a direct sales company, such as Avon in the main proceedings, results in the distribution chain of that company’s products bearing a greater VAT burden than its competitors’ products. However, such a circumstance is merely the consequence of the choice made by such a company to use the direct selling system to market its products.

54Accordingly, and in the light of the considerations set out in paragraphs 47 and 48 of the present judgment, the principle of fiscal neutrality cannot be interpreted as authorising that VAT to be taken into account in the taxable amount of the supplies referred to in Article 1 of Decision 89/534.

55Consequently, it must be held that Decision 89/534 is such as to affect the principle of neutrality as little as possible.

56It follows from all the foregoing considerations that examination of the first question has disclosed no factor of such a kind as to affect the validity of Decision 89/534.

The second question

57By its second question, the referring tribunal asks, in essence, whether Article 27 of the Sixth Directive must be interpreted as requiring the Member State which seeks authorisation to derogate from Article 11A(1)(a) of that directive to inform the Commission that non-taxable resellers incur VAT on purchases of demonstration items from a direct sales company that are used for the purposes of their economic activity, in order that account be taken, in one way or another, of that input tax in the detailed rules of the derogating measure.

Admissibility

58The United Kingdom Government submits that the second question is inadmissible, on the ground that, first, it bears no relation to the purpose of the main action, secondly, the Court does not have before it the factual or legal information necessary to give a useful answer to that question and, thirdly, that question is entirely hypothetical as the application for a derogation concerned Article 11A(1)(a) of the Sixth Directive and not Article 17 thereof, relating to the right to deduct VAT.

59It should be recalled that, according to the Court’s settled case-law, questions on the interpretation of EU law referred by a national court in the factual and legislative context which that court is responsible for defining, and the accuracy of which is not a matter for the Court to determine, enjoy a presumption of relevance. The Court may refuse to rule on a question referred for a preliminary ruling by a national court only where it is quite obvious that the interpretation of EU law that is sought bears no relation to the actual facts of the main action or its purpose, where the problem is hypothetical, or where the Court does not have before it the factual or legal material necessary to give a useful answer to the questions submitted to it (judgment of 14 June 2017, Santogal M-Comércio e Reparação de Automóveis, C‑26/16, EU:C:2017:453, paragraph 31 and the case-law cited).

60So far as concerns the first and third grounds of inadmissibility raised by the United Kingdom Government, it is sufficient to note that, as the Advocate General has stated in point 97 of his Opinion, if the Court were to interpret Article 27 of the Sixth Directive as requiring the Member State which seeks authorisation to derogate from that directive to provide, in support of its application, specific information, which was lacking in the present instance, such a reply would be liable to have an effect on the validity of Decision 89/534 and, therefore, on the outcome of the main action.

61So far as concerns the second ground of inadmissibility raised by the United Kingdom Government, in the present instance the referring tribunal set out the legal and factual context of the main action sufficiently precisely to enable the interested parties referred to in Article 23 of the Statute of the Court of Justice of the European Union to submit observations and to enable the Court to give a useful answer to the questions submitted to it.

62In the light of the foregoing, the second question is to be considered admissible.

Substance

63First of all, it should be recalled that the United Kingdom sought a derogation, pursuant to Article 27 of the Sixth Directive, from Article 11A(1)(a) thereof, which lays down the rules for determining the taxable amount for VAT purposes, in order to prevent the tax avoidance due to products being sold at the stage of final consumption by resellers not subject to VAT.

64Under Article 27(2) of the Sixth Directive, a Member State wishing to introduce measures derogating from that directive must provide the Commission with all the necessary information.

65In that regard, it should be noted that, by its judgment of 12 July 1988, Direct Cosmetics and Laughtons Photographs (138/86 and 139/86, EU:C:1988:383), relating in particular to the validity of Decision 85/369, which in the meantime has been replaced by Decision 89/534 which is essentially identical, the Court found no factors of such a kind as to affect the validity of Decision 85/369, after having, in particular, found, in paragraph 36 of that judgment, that the notification to the Commission referred in sufficient detail to the needs which the requested measure met and that it contained all the essential elements to enable the aim pursued to be identified.

66In that context, it should first of all be noted that the fact that non-taxable resellers incur VAT on purchases of demonstration items from a direct sales company, such as Avon in the main proceedings, without being able to deduct it, does not appear to be information which, as such, relates to the objective pursued by the derogation requested or to the fundamental mechanism of the derogation, namely the determination of the value of the taxable amount.

67Next, it is clear that that fact is inherent in the VAT system since, as has already been stated in paragraphs 42 and 48 of the present judgment, resellers not subject to VAT cannot exercise a right to deduct the tax that they are charged. Thus, the view cannot be taken that such a fact should have been notified to the Commission together with the application for a derogation that the United Kingdom sent it.

68Finally, a Member State cannot be required, when it requests, pursuant to Article 27 of the Sixth Directive, a derogation from that directive, to specify all the factual and legal aspects which have some relationship with the situation that it is seeking to remedy, but which do not result from that situation.

69It follows from all the foregoing considerations that the answer to the second question is that Article 27 of the Sixth Directive must be interpreted as not requiring the Member State which seeks authorisation to derogate from Article 11A(1)(a) of that directive to inform the Commission that non-taxable resellers incur VAT on purchases of demonstration items from a direct sales company that are used for the purposes of their economic activity, in order that account be taken, in one way or another, of that input tax in the detailed rules of the derogating measure.

The third question

70In view of the answers to the first and second questions, there is no need to answer the third question.

The fourth question

71By its fourth question, the referring tribunal asks whether, under Article 27 of the Sixth Directive, the ‘tax eva[ded] or avoid[ed]’ is to be measured as the net loss of tax to the Member State or the gross loss of tax to the Member State.

72The referring tribunal does not set out a ground of invalidity of Decision 89/534 that is connected with the way in which the amount of tax not levied because of tax evasion or avoidance as referred to in Article 27 of the Sixth Directive is determined. Nor does the referring tribunal explain why the interpretation of that article in so far it refers to ‘tax evasion or avoidance’ is relevant to the outcome of the dispute before it.

73In the absence of those particulars, the Court is not in a position to give a useful answer to the fourth question referred, which, consequently, must be declared inadmissible.

Costs

74Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the referring tribunal, the decision on costs is a matter for that tribunal. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

On those grounds, the Court (Third Chamber) hereby rules:

Articles 17 and 27 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 2004/7/EC of 20 January 2004, must be interpreted as not precluding a measure, such as that at issue in the main proceedings, authorised by Council Decision 89/534/EEC of 24 May 1989 authorising the United Kingdom to apply, in respect of certain supplies to unregistered resellers, a measure derogating from Article 11A(1)(a) of the Sixth Directive, pursuant to Article 27 of that directive, which derogates from Article 11A(1)(a) of that directive and under which the taxable amount for valued added tax (VAT) purposes of a direct sales company is the open market value of the goods sold at the stage of final consumption, where those goods are marketed through resellers not subject to VAT, even if that derogating measure does not take account, in one way or another, of the input VAT relating to demonstration items purchased by those resellers from that company.

Examination of the first question has disclosed no factor of such a kind as to affect the validity of Decision 89/534.

Article 27 of Sixth Directive 77/388, as amended by Directive 2004/7, must be interpreted as not requiring the Member State which seeks authorisation to derogate from Article 11A(1)(a) of that directive to inform the European Commission that non-taxable resellers incur VAT on purchases of demonstration items from a direct sales company that are used for the purposes of their economic activity, in order that account be taken, in one way or another, of that input tax in the detailed rules of the derogating measure.

Signatures

Bay Larsen

Malenovský

Safjan

Šváby

Vilaras

Delivered in open court in Luxembourg on 14 December 2017.

A. Calot Escobar

Registrar

L. Bay Larsen

President of the Third Chamber

( *1 ) Language of the case: English.

OPINION OF ADVOCATE GENERAL

BOBEK

delivered on 7 September 2017 ¹

(VAT — Derogation — Sales through intermediaries not subject to VAT — Taking into account notional input tax)

I. Introduction

1Avon Cosmetics Limited (‘Avon’) sells its beauty products in the United Kingdom to representatives, known colloquially as ‘Avon Ladies’, who in turn make retail sales to their customers (‘direct selling model’). Many of the Avon Ladies are not registered for VAT. As a result, their profit margins would not normally be subject to VAT.

2That problem of ‘lost VAT’ or ‘VAT avoidance’ at the last stage of the supply chain is typical of direct selling models. In order to deal with that problem, the United Kingdom sought and obtained a derogation from the standard rule that VAT is charged on the actual sales price. In Avon’s case, that derogation essentially allowed the United Kingdom’s tax authority, Her Majesty’s Revenue and Customs (‘HMRC’), to charge Avon VAT, not on the wholesale price paid by the unregistered Avon Ladies, but instead on the retail price at which the Avon Ladies would go on to sell the products to the final consumer.

3However, the way the derogation is applied does not take into account the costs incurred by the unregistered representatives in their retail selling activities, and the input tax that they would normally have been able to deduct had they been VAT registered (‘notional input tax’). In particular, where Avon Ladies buy products for demonstration purposes (not to resell but to use as a selling aid) they cannot deduct VAT on those purchases as input tax.

4The result is that the disregarded notional input tax in relation to such costs ‘sticks’ in the supply chain and increases the overall VAT charged on the direct selling model over that charged on sales through ordinary retail outlets.

5In the context of a challenge by Avon of its VAT assessment, the referring court asks a number of questions concerning the interpretation and validity of the Derogation. In particular, the referring court asks: (i) whether there is an obligation to take into account the notional input tax of direct resellers such as the Avon Ladies, (ii) whether there was an obligation for the United Kingdom to bring the issue of notional input tax to the European Commission’s attention when it requested the Derogation, and (iii) what would be/what are the consequences of failing to comply with either of those obligations.

II. Legal framework

A. EU law

1. VAT Directives 77/388 and 2006/112

6The relevant provisions of EU legislation which applied at the time of the arrangements in question are contained in VAT Directive 77/388/EEC ² (‘the Sixth VAT Directive’), for periods prior to 1 January 2007. For periods after that date they are found in VAT Directive 2006/112/EC ³ (‘the Principal VAT Directive’).

7Save for some minor differences noted below, the relevant provisions of the Sixth VAT Directive and the Principal VAT Directive are identical. In this section, provisions of the Sixth VAT Directive will be cited below with the corresponding provisions of the Principal VAT Directive referred to in footnotes. For ease of presentation, only the relevant provisions of the Sixth VAT Directive will be cited in the remainder of this Opinion, with the corresponding provisions of the Principal VAT Directive applying mutatis mutandis.

8Under Article 2 of the Sixth VAT Directive: ⁴

‘The following shall be subject to value added tax:

1the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such.’

9Article 4 of the Sixth VAT Directive provides: ⁵

“Taxable person” shall 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.’

10Article 11(A)(1)(a) of the Sixth VAT Directive provides: ⁶

‘A. Within the territory of the country

1The taxable amount shall be:

in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies.’

11According to Article 27 of the Sixth VAT Directive: ⁷

‘1. The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the overall amount of the tax revenue of the Member State collected at the stage of final consumption.

2. A Member State wishing to introduce the measure referred to in paragraph 1 shall send an application to the Commission and provide it with all the necessary information. …

…

5. Those Member States which apply on 1 January 1977 special measures of the type referred to in paragraph 1 above may retain them providing they notify the Commission of them before 1 January 1978 and providing that where such derogations are designed to simplify the procedure for charging tax they conform with the requirement laid down in paragraph 1 above.’

2. Council Decision 89/534/EEC (‘the Derogation’)

12Recitals 3 to 5 of the Derogation ⁸ state:

‘Whereas certain marketing structures based on sales of goods effected by taxable persons to non-taxable persons with a view to their resale at the retail stage result in avoidance of tax at the stage of final consumption;

Whereas, in order to prevent such tax avoidance, the United Kingdom applies a measure permitting the tax authorities to adopt administrative decisions the effect of which is to tax supplies made by the taxable persons operating such marketing structures on the basis of the open market value of the goods at the retail stage;

Whereas that measure constitutes a derogation from Article 11(A)(1)(a) of the Sixth Directive, which stipulates that, within the territory of the country, the taxable amount in respect of supplies of goods is everything which constitutes the consideration which has been, or is to be, obtained by the supplier from the purchaser or a third party for such supplies.’

13Recitals 9 and 10 state that:

‘Whereas, in its judgment of 12 July 1988, the Court of Justice ruled inter alia that Article 27 of the Sixth Directive permitted the adoption of a derogating measure such as that at issue on condition that the resultant difference in treatment was justified by objective circumstances;

Whereas, in order to satisfy itself that this condition is met, the Commission must be informed of any administrative decisions adopted by the tax authorities in connection with the derogation in question.’

14Article 1 of the Derogation provides as follows:

‘By way of derogation from Article 11(A)(1)(a) of the Sixth Directive, the United Kingdom is hereby authorised to prescribe, in cases where a marketing structure based on the supply of goods through non-taxable persons results in non-taxation at the stage of final consumption, that the taxable amount for supplies to such persons is to be the open market value of the goods as determined at that stage.’

B. National law

1. Value Added Tax Act 1994

15The Sixth VAT Directive, and now the Principal VAT Directive, is implemented into domestic law in the United Kingdom by the Value Added Tax Act 1994 (‘VATA 1994’), section 1 of which provides:

‘Value added tax shall be charged, in accordance with the provisions of this Act‑

on the supply of goods or services in the United Kingdom ...’

16The value of a supply of goods on which VAT is due is determined by section 19 and Schedule 6 of VATA 1994. Section 19(2) states:

‘If the supply is for consideration in money its value shall be such amount, as with the addition of the VAT chargeable, is equal to the consideration.’

17Pursuant to the Derogation, what is now paragraph 2 of Schedule 6 of VATA 1994 permits HMRC to direct that the value of a supply of goods by a taxable person shall be taken to be its open market value on a sale by retail (in effect, an increased valuation from that which would arise under Article 11(A)(l)(a) of the Sixth VAT Directive) in circumstances where those goods are to be sold on by non-taxable persons, where:

the whole or part of a business carried on by a taxable person consists in supplying to a number of persons goods to be sold, whether by them or others, by retail, and

those persons are not taxable persons,

the Commissioners may by notice in writing to the taxable person direct that the value of any such supply by him after the giving of the notice or after such later date as may be specified in the notice shall be taken to be its open market value on a sale by retail.’ (‘Notice of Direction.’)

2. Notice of Direction

18On 27 June 1985 HMRC issued a Notice of Direction to Avon, which remains in place to this day. It states:

‘In pursuance of [paragraph 2 to Schedule 6 of VATA 1994] the Commissioners of Customs & Excise hereby DIRECT that after 1 July 1985 the value by reference to which Value Added Tax is charged on any taxable supply of goods:-

by you to persons who are not taxable persons ...

to be sold, whether by persons mentioned in (a) above or others, by retail,

shall be taken to be its open market value on a sale by retail.’

III. Facts, proceedings and questions referred

19Avon uses a direct selling model in the United Kingdom. Under that model, Avon sells its products to its representatives, the Avon Ladies, who in turn make retail sales to their customers at a markup. For example, where Avon sells a product to the Avon Ladies for 75 pounds sterling (GBP), it might be resold by the Avon Ladies for GBP 100.

20The threshold for compulsory registration for VAT in the United Kingdom is high — GBP 100000. Some Avon Ladies have chosen to register for VAT. However, many fall below the threshold for compulsory registration and have chosen not to register.

21As a result, the profit margins made by those unregistered Avon Ladies would not normally be subject to VAT. So, in the above example, VAT is charged on the GBP 75 ‘wholesale’ price, but not on the GBP 25 ‘retail profit margin’ earned by the unregistered Avon Ladies. That problem of ‘lost’ VAT at the last stage of the supply chain can also arise in other direct selling models (for example some instances of door-to-door sales).

22In order to address the problem of lost VAT arising from use of the direct selling model, the United Kingdom obtained a derogation from the standard rule that VAT must be charged on the actual sales price (Article 11(A)(1)(a) of the Sixth VAT Directive).

23The Derogation essentially allows HMRC, in cases where the direct selling model is used, to charge VAT not on the wholesale price (which in this case is the price paid to Avon), but rather on the retail price (or best guess thereof) paid by the end customer to the reseller, that is, to the Avon Ladies.

24The Derogation was transposed into domestic law and implemented by way of ‘Notices of Direction’. Notices of Direction have been sent by the United Kingdom authorities to around 40 companies, including Avon.

25The Derogation is not applied to all Avon sales indiscriminately.

26A small number of Avon Ladies are VAT registered. VAT is charged in the normal way on their sales. Thus, Avon must account for output VAT on the price it charges to the VAT registered Avon Ladies. Those Avon Ladies must account for output VAT on the sales price to the end customer. But they can deduct input VAT in relation to the corresponding purchases from Avon.

27HMRC and Avon have also agreed to two adjustments to the application of the Derogation. First, some Avon Ladies keep (some of) the products they buy from Avon for personal use. They thus become the end customers in respect of those products themselves. Second, Avon Ladies on occasion offer small discounts. In both cases, application of the Derogation would end up in VAT being overcharged. Therefore, the proportion of sales made in those two categories is considered by Avon and HMRC from time to time. According to the order for reference, very accurate figures are derived to reflect both points.

28The above are all examples of situations where there is no dispute in principle about the non-application or modified application of the Derogation to sales by Avon. The present case concerns an aspect of application of the Derogation that is disputed, namely: sales of demonstration products.

29Avon sells some products to the Avon Ladies for demonstration purposes. These are typically sold at a greater discount than usual. Some of the demonstration products are used as intended, for example as a sales aid. Some are kept by the Avon Ladies for their personal use. Avon and HMRC agree that approximately 50% of products that are sold as demonstration products instead end up being used by the Avon Ladies themselves. That is apparently why Avon does not give away its demonstration products for free. In those cases, the Avon Ladies are the final customers and VAT is charged on the price paid to Avon in application of the standard rule under Article 11(A)(1)(a) of the Sixth VAT Directive. No dispute arises in relation to those demonstration products.

30The dispute arises in relation to the approximately 50% of demonstration products that are actually used as intended: they are not resold but employed as a business tool designed to increase other sales. For VAT registered retailers, the VAT paid on the purchase of those products would normally have secured an input tax deduction. However, that cost is not taken into account in the application of the Derogation. As a result, the incidence of VAT in relation to sales made through unregistered Avon Ladies is greater than that which applies in the few cases where Avon Ladies are registered. It is also greater than the level of tax where sales to end customers are made by registered sellers.

31According to the order for a reference, disregarding those costs has resulted in an increase of VAT of around GBP 16 million over the period 1997 to 2013.

32In the case before the referring court, Avon disputes the way the Derogation is being applied by HMRC. It argues that the Derogation should apply in such a manner as to ensure that Avon is not excessively taxed and that the amount collected under the Derogation is brought closer in line with the VAT ‘avoided’. Avon argues that if the Derogation cannot be interpreted in such a way, it is invalid. Finally, Avon also argues in substance that, when requesting the Derogation, the United Kingdom was under an obligation to raise the issue of the impossibility of deducting input tax and the effect on the level of ‘avoided’ tax. The United Kingdom’s failure to do so is also a ground for invalidity of the Derogation.

33In the light of the foregoing the First-tier Tribunal (Tax Chamber) puts the following questions to this Court:

Where a direct seller sells goods (“Sales Aids”) to unregistered resellers or the unregistered reseller purchases goods and services from third parties (“Third Party Goods and Services”) which are in both cases used by the unregistered resellers to assist their economic activity of selling other goods which are also purchased from the direct seller and the subject of administrative arrangements issued pursuant to a derogation most recently authorised by Council Decision of 24 May 1989 (89/534/EEC) (the “Derogation”), do the relevant authorisations, implementing legislation and/or administrative arrangements offend any relevant provisions and/or principles of EU law in so far as they require the direct seller to account for output tax on the unregistered resellers’ sale price of the other goods with no reduction for the VAT incurred by the unregistered reseller on such Sales Aids and /or Third Party Goods and Services?

Whether the United Kingdom was under any obligation to inform the Commission when seeking authorisation from the Council for the Derogation, that unregistered resellers incurred VAT on purchases of Sales Aids and/or Third Party Goods and Services used for the purposes of their economic activities and that, accordingly, an adjustment to reflect that irrecoverable input tax, or overpaid output tax, should be accommodated in the derogation?

In the event that the answer to questions 1 and/or 2 above is in the affirmative:

Whether any of the relevant authorisations, implementing legislation or administrative arrangements can and should be interpreted so as to make an allowance in respect of either (i) irrecoverable VAT on Sales Aids or Third Party Goods and Services borne by unregistered resellers and used by such unregistered resellers for the purposes of their economic activities; OR (ii) VAT in excess of the tax avoided being collected by Her Majesty’s Revenue & Customs OR (iii) the potential unfair competition that arises between direct sellers, their unregistered resellers and non-direct selling businesses.

Whether:

the authorisation of the UK’s derogation from Article 11(A)(1)(a) of the Sixth Directive was unlawful;

a derogation from Article 17 of the Sixth Directive is necessary alongside the derogation from Article 11(A)(1)(a). If so, whether the UK acted unlawfully by failing to ask the Commission or the Council to authorise it to derogate from Article 17;

the UK is acting unlawfully by failing to administer VAT in such a way as to allow direct sellers to claim a credit for either Sales Aids or Third Party Goods and Services VAT incurred by unregistered resellers for the purposes of their economic activities;

all or any part of the relevant authorisations, implementing legislation or administrative arrangements are therefore invalid and/or unlawful.

Whether the appropriate remedy is, from the Court of Justice of the European Union or from the national Tribunal or Court:

a direction that the Member State is required to give effect to the Derogation in domestic law by providing for an appropriate adjustment for any of (a) irrecoverable VAT on Sales Aids or Third Party Goods and Services borne by unregistered resellers and used by such unregistered resellers for the purposes of their economic activities; OR (b) VAT in excess of the tax avoided being collected by Her Majesty’s Revenue & Customs; OR (iii) the potential unfair competition that arises between direct sellers, their unregistered resellers and non-direct selling businesses; or

a declaration that the authorisation of the Derogation, and by extension the derogation itself, is invalid; or

a declaration that the domestic legislation is invalid; or

a declaration that the Notice of Direction is invalid; or

a declaration that the UK is obliged to apply for authorisation for a further derogation so to provide for an appropriate adjustment for any of (a) irrecoverable VAT on Sales Aids or Third Party Goods and Services borne by unregistered resellers and used by such unregistered resellers for the purposes of their economic activities; OR (b) VAT in excess of the tax avoided being collected by Her Majesty’s Revenue & Customs; OR (iii) the potential unfair competition that arises between direct sellers, their unregistered resellers and non-direct selling businesses.

Under Article 27 of the Sixth Directive (Article 395 of the Principal VAT Directive), is the “tax eva[ded] or avoid[ed] ” to be measured as the net loss of tax (taking account of both the output tax paid and input tax recoverable in the structure giving rise to the tax evaded or avoided) to the Member State or the gross loss of tax (taking account of only the output tax in the structure giving rise to the tax evaded or avoided) to the Member State?’

34Written observations have been submitted by Avon, the United Kingdom Government, the Commission and the Council of the European Union. The interested parties that participated in the written stage presented oral argument at the hearing held on 31 May 2017.

IV. Assessment

35This Opinion is structured as follows: I shall deal first with questions one and four as submitted by the referring court. Since my proposed answer to the Court on question one is in the negative (1), there is, therefore, no need to address the fourth question referred by the national court (2). Furthermore, my suggested answer to the national court’s second question is also in the negative (3). Hence, again there is no need to address the third question (4).

1. First question

36Does the Derogation or national measures implementing it infringe the Sixth VAT Directive and/or the general principles governing its application to the extent that they impose VAT on the open market value of products sold via resellers not registered for VAT, without taking into account notional input VAT on demonstration items or other goods and services purchased from third parties by those resellers? That is in essence the referring court’s first question.

(a) General rules governing derogations granted under Article 27 of the Sixth VAT Directive

37Article 27(1) of the Sixth VAT Directive foresees the authorisation of ‘derogation[s] from the provisions of this Directive … to prevent certain types of tax evasion or avoidance’.

38This case concerns a derogation from Article 11(A)(1)(a) of the Sixth VAT Directive, which defines the ‘taxable amount’. No derogation is foreseen with regard to the remaining provisions of the Sixth VAT Directive or to the general principles thereof. Both of them thus remain fully applicable. ⁹

39A derogation from generally applicable rules by definition deviates from those rules. As such, it is only logical that the final result is likely to be different from the one that would have prevailed following full application of those general rules. ¹⁰

40However, as with any exception, derogations granted under Article 27(1) must be interpreted strictly. They are granted in relation to specific provisions of the Directive ¹¹ and only in order either to simplify collection of VAT or to prevent tax evasion and avoidance. Moreover, ‘they may not derogate from the basis for charging VAT laid down in Article 11, except within the limits strictly necessary for achieving that aim’. ¹² They must also be necessary and appropriate for realising the specific objective which they pursue and have as little effect as possible on the objectives and principles of the Sixth VAT Directive. ¹³

41Article 27(1) also states that derogations ‘may not affect the overall amount of the tax revenue of the Member State collected at the stage of final consumption’‘except to a negligible extent’ (emphasis added). Article 27(1) explicitly provides that those limitations on ‘overall amount’ and ‘negligible extent’ apply to simplification measures. The Court’s case-law has held that those limitations are ‘in conformity with the fundamental principles of the Sixth Directive’ and apply equally to derogations aimed at preventing tax evasion or avoidance. ¹⁴

(b) The basic concern with failure to consider ‘notional’ input tax

42In this case, the United Kingdom obtained the Derogation from Article 11(A)(1)(a) for the purposes of preventing tax evasion or avoidance. In doing so, it sought to react to a specificity of the direct selling business model used by Avon and others, namely the non-application of VAT to the final stage in the supply chain, which results in a relative reduction in output tax.

43In its written and oral pleadings, Avon insisted on the fact that the Derogation was also sought to prevent distortion of competition. However, since Article 27(1) of the Sixth VAT Directive only foresees the grant of derogations to pursue the objectives of tax evasion and avoidance (simplification not being invoked), it must be assessed principally in the light of that objective.

44It is not disputed that the direct selling model used by Avon and others might result in tax avoidance at the stage of final consumption. Thus, a derogation under Article 27(1) can, in principle, be justified.

45However, Avon considers that the Derogation is not correctly applied. HMRC takes into account only the output tax that the Avon Ladies would normally pay on their markup if they were VAT registered. HMRC fails to consider the input tax the Avon Ladies would normally be able to deduct if they were VAT registered (specifically input tax on sales aids). Avon argues that failure to do so results in an ‘overcorrection’ of the original problem (namely, the non-application of VAT to the final stage in the supply chain). That overcorrection leads to a breach of the principle of proportionality. It also breaches the principle of fiscal neutrality, since the overcharge results in a competitive disadvantage vis-à-vis high street retailers. Finally, it goes beyond the limits imposed by Article 27(1) of the Sixth VAT Directive.

46I disagree with Avon’s assertion that HMRC’s refusal to consider notional input tax is necessarily problematic for the following reasons.

47First, the Derogation simply does not foresee or allow for the taking into account of notional input tax. So in that sense, the Derogation cannot be applied in a ‘modified’ way so as to take into account such notional input tax (Section (c)).

48Second, the Derogation is not intended to be applied in such a way as to emulate the tax situation that would prevail if the Avon Ladies were all registered (Section (d)).

49Third, the fact that the Derogation does not foresee or allow for the taking into account of notional input tax does not in itself breach the principles of fiscal neutrality or proportionality, or exceed the limits imposed by Article 27 of the Sixth VAT Directive. It is conceivable that application of the Derogation might raise issues in the light of those principles and provisions if failure to consider notional output VAT were to affect to a non-negligible extent the amount of VAT collected at the final stage of consumption. However, in my opinion and subject to the referring court’s final assessment, that seems a rather theoretical possibility in the context of the present case (Section (e)).

(c) Scope of the Derogation

50In accordance with the wording of Article 27(1) of the Sixth VAT Directive and the general rule that exceptions must be narrowly interpreted, ¹⁵ derogations are granted in relation to specific provisions of that directive.

51The Derogation in this case was explicitly granted in relation to Article 11(A)(1)(a), authorising a deviation from the normal rules applicable to calculate the ‘taxable amount’, that is the amount on which output VAT is imposed. Thus, the text of Article 1 of the Derogation states that ‘the taxable amount for supplies to [non-taxable resellers] is to be the open market value of the goods as determined at that stage’.

52As explained above in point 27, through two adjustments, HMRC seeks to ensure that the taxable amount calculated in application of the Derogation best reflects the purchase price actually paid by the final consumer. That is in line with the Court’s finding in Direct Cosmetics II in relation to the predecessor of the Derogation, ¹⁶ that ‘the open market value for the purposes of the system established by the derogating measure in question must be understood as meaning the value that is closest to the … actual price paid by the final consumer’. ¹⁷

53By contrast, no derogation was requested in relation to the normal rules applicable to input tax deduction in particular under Article 17(1) of the Sixth VAT Directive. ¹⁸ There is no mention in the Derogation of the taking into account of the costs incurred by non-taxable resellers when calculating the open market value of the products sold. To the extent the Avon Ladies are not taxable persons, there is no right of deduction. Under application of the normal rules, input tax in relation to costs incurred by them, such as the cost of sales aids, is unrecoverable. Moreover, with reference to the preceding paragraph, it is clear that the existence and extent of any notional input tax incurred by resellers is incapable of affecting the actual price paid by the final consumer.

54As a result, in the light of the explicit scope of the Derogation, I consider that any adjustment for notional input tax is not foreseen or allowed by it. That conclusion follows from the very nature of a narrow exception. Beyond such a textual and systemic argument, expanding exceptions in the way suggested could raise issues of legal certainty if a derogation requested and granted solely in relation to either input or output tax would, nonetheless, leave it open to Member States to determine whether to take the other into consideration.

55In the light of the foregoing, I consider that application of the Derogation cannot be modified to take into account notional input tax incurred by resellers who are non-taxable persons.

(d) The accommodation of alternative business models and absence of perfect solutions

56Avon’s position is, in substance, that adjustments currently made to the ‘taxable amount’ in application of the Derogation could be further refined. That refinement would be to take into account the notional input tax incurred by the Avon Ladies who are not registered for tax and not taxable persons (specifically in relation to the sales aids). In Avon’s words, this would ‘bring it as closely as possible into line with a fully taxable supply chain’. Since such adjustments are possible they must be made in order to respect the principles of proportionality and fiscal neutrality and the limits imposed by Article 27(1) of the Sixth VAT Directive.

57It is indeed correct that the taking into account the cost of the sales aids would bring the result closer to the notional ‘net’ tax avoided if one were to imagine that the Avon Ladies were in reality tax registered. However, for the reasons set out above under Section (c), in my opinion the text of the Derogation simply does not allow for such modifications.

58Moreover, it is also not the purpose of the Derogation to try to reconstruct a kind of virtual, parallel reality, which is as close as possible to the one that would prevail if the unregistered Avon Ladies were in fact registered, and then to work out what the VAT position would have been. The purpose of the Derogation is to prevent tax avoidance, in full recognition that the VAT rules are being applied in a non-standard way to a specific situation.

59Avon observes that in seeking to solve one problem (non-taxation at the final stage of the supply chain and breach of the principle of fiscal neutrality to the detriment of Avon’s competitors), the Derogation ¹⁹ creates another (breach of the principle of fiscal neutrality to the detriment of Avon, which suffers an ‘overcorrection’ of its VAT bill).

60It is true that the Derogation comes with issues of its own. However, it does seek to address those issues raised by the direct selling model, in particular that VAT is a tax on consumption but sales to final consumers by persons who are not taxable escape the VAT net. Moreover, the Derogation has the merit of allowing the direct selling model to be catered for within the VAT system and to continue in use. As Avon has amply demonstrated the result is not ‘perfect’ in the sense of precisely reflecting the situation as it would be but for the lack of registration of the Avon Ladies. However, such differences are inherent in the coexistence of two alternative and rather different business models. Whilst it is possible to cater for different models within the VAT system, that cannot extend to effectively creating detailed parallel regimes.

61That leads me to my next point, which I consider to be critical in this case: the choice of business model. The Avon Ladies can choose whether to register. Although the threshold for compulsory VAT registration in the United Kingdom is high, the Avon Ladies may register below that threshold. Avon can also choose whether to use registered or unregistered resellers. Avon and the Avon Ladies will have their reasons for going one way or the other, for example, to follow the most competitive business model or avoid the cumbersome administrative burden associated with being registered for VAT.

62However, the fact of being a non-taxable person also has other consequences, including the impossibility of deducting input tax. As confirmed on several occasions by the Court, as regards VAT, economic operators have the right to organise their activities in a way that limits their exposure to tax. ²⁰ Nonetheless, that freedom of choice does not include opting for a particular business model and then having à la carte access to the VAT rules normally applicable to other models.

63At the hearing, Avon recalled that, if the rules were applied in the standard way to its sales, there would be no adjustment for output tax at all. The Derogation in fact serves to increase the tax burden on Avon. In other words, Avon is not asking for à la carte application of the VAT rules. As maintained at the hearing, Avon is not asking to ‘have its cake and eat it’. Rather it is HMRC that is seeking selective application of the VAT rules through a specific derogation. HMRC is the one looking to order free cake.

64The dispute as to who exactly is requesting free cake in the present case hints at a deeper disagreement: in response to whose action did the normal VAT system start needing readjustment? Avon is suggesting that the problems are attributable to the Derogation and/or its incorrect application. If the United Kingdom did not request it, the normal VAT rules would be applicable. No problem would arise. By contrast, the United Kingdom’s position is that the Derogation was requested only in response to the direct selling model, that is, in order to remedy a problem which was already there, inherent in the operation of that model. Thus, the underlying logic was that that model could be kept, but subject to the readjustments enabled by the Derogation.

65That discussion takes one straight back to the point raised above, namely that some differences in VAT treatment are inevitable given the coexistence of two alternative and rather different business models. There is no perfect solution. The fact that the Derogation does not seek one and is applied with ‘imperfect’ results is not in itself problematic. ²¹

66Bearing those general observations in mind, I now turn to the specific issues raised by Avon: proportionality, Article 27(1) of the Sixth VAT Directive, and fiscal neutrality.

(e) No violation of the principle of proportionality, Article 27 of the Sixth VAT Directive or the principle of fiscal neutrality

(1) Proportionality and Article 27(1)

67In order to respect the principle of proportionality, measures must be necessary and appropriate to achieve the specific objective which they pursue and have as little effect as possible on the objectives and principles of the Sixth VAT Directive. ²²

68It was already noted ²³ that the Derogation pursues the legitimate objective of preventing tax avoidance. ²⁴ It also makes it possible to limit any distortions of competition that might exist to the detriment of undertakings adopting a different distribution model. ²⁵

69Moreover, adjustments are made to the taxable amount to take into account situations where the price paid by the final consumer is less than full ‘catalogue price’. ²⁶ To that extent the output tax imposed is proportionate. It is no more and no less than what is normally required by the nature of VAT as a tax on consumption.

70I also explained above why, in my opinion, it cannot be expected that the Derogation be applied in such a way as to emulate as closely as possible the tax position that would exist in the case of a fully taxable supply chain. Thus, the mere fact that notional input tax is ‘disregarded’, leading to a tax position different from that which would apply in the case of a fully taxable supply chain does not in itself conflict with the principle of proportionality. ²⁷

71Is it nonetheless possible that the amount of notional input tax disregarded is so significant that application of the Derogation would result in a breach of the principle of proportionality?

72That is, in my view, theoretically possible, and if such a breach were to be found, the solution would be that the Derogation could not be applied to Avon. However, subject to final assessment by the referring court, it seems highly unlikely in the present case. In that regard I observe the following points relating to (i) risk and proof, (ii) complexity and administrative burden, and (iii) materiality.

73First, as regards risk and proof, it is important to recall that the purpose of the Derogation is to prevent tax evasion and avoidance. The Avon Ladies are not taxable persons and simply do not bear the obligations of documentation and justification that taxable persons do, which would allow them to demonstrate that they would have had a right of deduction (and the extent of that right) if they had been registered. Any potential consideration of notional input tax would be subject to acceptable documentary evidence ²⁸ being provided by Avon demonstrating that such costs had been incurred.

74Second, in the Sudholz case, the Court held that overly complicating the process of applying a derogation can have the effect of neutralising its benefits. ²⁹ Attempting to account for notional input tax undeniably increases the degree of complexity involved in applying the derogation, especially given the absence of complete records in relation to relevant costs. Admittedly, the Sudholz case concerned a derogation aimed at simplification. However, the concern in Sudholz about added complexity is, in my view, equally valid as regards the Derogation in the present case. One of the attractions of the direct selling model is specifically the reduced complexity in terms of administration. Bringing that complexity in ‘through the back door’ in practice by (partially) delegating to the public administration an administrative burden that the Avon Ladies have chosen not to assume ³⁰ is, to my mind, just as problematic as in the Sudholz case.

75Third, in the light of the previous two points, clear and unequivocal evidence of costs giving rise to notional input tax exceeding a material threshold is necessary before it could be held that an absolute refusal to consider those costs is disproportionate.

76What is that threshold of materiality?

77The starting point in answering that question is Article 27(1) of the Sixth VAT Directive, which captures the principle of proportionality in the context of that specific provision, ³¹ providing that derogations ‘except to a negligible extent, may not affect the overall amount of the tax revenue of the Member State collected at the stage of final consumption’.

78In my view, any threshold of materiality must be objective. In order to respect equal tax treatment and reflecting the above wording of Article 27(1), it cannot differ depending on the specific circumstances of a given taxpayer, but must be assessed with reference to the VAT revenues of the Member State.

79However, the point of comparison for determining what is or is not ‘negligible’ is not clear. Thus, a range of meanings of quite different orders of magnitude could potentially be attributed to the words ‘overall amount of tax revenue of the Member State collected at the stage of final consumption’.

80There are at least three conceivable options, depending on whether the comparison of what is not negligible would be carried out with regard to:

the total of the EU’s own resources provided from VAT. That reading finds support in the recitals of Directive 2004/7/EC, ³² which added the word ‘overall’ to Article 27(1) and which stated explicitly that assessment ought to be ‘made in a global manner by reference to macroeconomic forecasts relating to the likely impact of the measure on the Community’s own resources provided from VAT’; ³³

the total of Member State resources provided from VAT. That reading is closer to the more natural meaning of ‘tax revenue of the Member State collected at the stage of final consumption’, since it is clearly stated that what is aimed at is the tax revenue of the Member State, and not the tax revenue of the Community;

VAT revenues from a specific supply chain or from individual products or transactions. That reading arguably finds some support, for example, in the Court’s judgment in Vandoorne. ³⁴ In that case, the Court effectively held that reimbursement of VAT would not be negligible because it would represent 100% of the VAT paid on supplies to a single customer. ³⁵

81I am of the opinion that both the wording and the logic of Article 27(1) of the Sixth VAT Directive and Directive 2004/7 tend to point more towards one of the macroeconomic points of comparison, namely at the level of the Union or at the level of the individual Member State. In my view the ‘Vandoorne’ approach goes too far in the opposite direction. It comes close to requiring a detailed approach of the type rejected above in points 60 to 62. It could in fact seriously compromise the application of any derogation. It is also important to underline that the circumstances in Vandoorne were rather specific, in particular the fact that VAT was paid up front by the supplier.

82However, I consider that there is in fact no need for the Court to address this issue in detail in the context of the present case, as (subject to factual verifications by the referring court) none of the above thresholds appear to be met. Thus, on a macroeconomic scale the figures involved are tiny. On a more microeconomic, transaction by transaction level, according to the figures provided, the amounts involved still appear to be very marginal.

83In the light of the foregoing, it is in my view not possible to argue that the refusal to take into account notional input tax associated with sales aids would have a non-negligible impact on the ‘[overall] amount of tax revenue of the Member State collected at the stage of final consumption’. As a result, and subject to the final assessment by the referring court, I consider there to be no breach of the principle of proportionality or the limits imposed by Article 27(1) of the Sixth VAT Directive.

(2) Fiscal neutrality

84As regards fiscal neutrality, that principle precludes treating similar goods and supplies of services differently for VAT purposes. ³⁶

85Let us assume for these purposes that products sold through direct selling structures such as Avon’s and more traditional retail outlets can indeed be considered to be ‘similar’ within the meaning of the Court’s case-law, which, in my view, is not so obvious.

86However, even if that were the case, then both with and without the Derogation there is a potential issue of fiscal neutrality, in the former case to the detriment of Avon and in the latter to the detriment of its competitors. ³⁷ To use Avon’s words, in solving one problem, another has been created.

87In that regard, I refer to the comments above in point 60 to the effect that, in cases such as the present involving very different business models, perfectly equal treatment is simply not achievable.

88It might be argued, nonetheless, that ‘more equal’ treatment is possible in this case. That in my view is, however, simply a restatement of the proportionality argument, which has already been rejected above.

89In the light of the foregoing, the Derogation and its application by the United Kingdom authorities do not conflict with the principle of proportionality and fiscal neutrality or Article 27(1) of the Sixth VAT Directive to the extent that ‘notional input tax’ generally, and specifically in relation to sales aids, is not taken into account.

(f) Conclusion on the first question

90In view of the above, I suggest that the Court reply to the first question of the referring court as follows:

Neither the Derogation nor, subject to the referring court’s final assessment, national measures implementing that decision — to the extent that that decision and those national measures result in the imposition of VAT on the open market value of products sold via non-VAT registered resellers without taking into account irrecoverable input VAT on demonstration items or other goods and services purchased from third parties by those resellers — infringe the principles of proportionality and fiscal neutrality or Article 27(1) of the Sixth VAT Directive or Article 395 of Directive 2006/112.

2. Fourth question

91In essence, the referring court’s fourth question is whether under Article 27 of the Sixth VAT Directive, the tax ‘evaded or avoided’ means (i) the net tax, taking into account the output and input tax in the structure giving rise to the evasion or avoidance, or (ii) the gross tax, taking into account only the output tax?

92In the light of the negative answer given to the first question, there is no need to consider the fourth question.

3. Second question

93Article 27(2) of the Sixth VAT Directive provides that Member States seeking a derogation ‘shall provide the Commission with all relevant information’. The second question of the national court asks essentially whether that provision required the United Kingdom to raise the issue of irrecoverable input VAT in this case, so that it could be factored into the Derogation.

(a) Admissibility

94The United Kingdom Government argues that the second question is inadmissible. In that regard, it considers that it is unclear why the question is being asked, that the Court does not have the factual and legal background necessary to be able to answer it, and moreover that the question is hypothetical.

95I disagree.

96In that regard, I recall first that questions put to this Court by national courts enjoy, in general, a presumption of relevance. ³⁸ In the present case, and contrary to the arguments put forward by the United Kingdom Government, it appears to me rather clear why the referring court asks its second question and why the answer could have an impact on the outcome of the case.

97If Article 27 of the Sixth VAT Directive were to impose a legal obligation on a Member State to provide specific information to the Commission in the context of a request for a derogation, I can see why a failure to do so might well have consequences for the validity of the derogation ultimately granted.

98As regards the absence of sufficient elements to enable the Court to give a useful answer, the United Kingdom Government refers in particular to a letter sent by Avon to HMRC raising the issue of ‘lost input tax’ and asserts that the Court is not in a position to assess the weight that should have been attached to that letter. In my view, however, the referring court’s second question is rather at the level of principle, asking whether there was an obligation to raise certain issues with the Commission rather than what specific pieces of factual information had to be communicated in the present case.

99Finally, the United Kingdom Government asserts that the second question is hypothetical because information on costs incurred by direct sellers would only be relevant in relation to a derogation from the rules normally applying to input tax deduction under Article 17 of the Sixth VAT Directive. However, no such derogation was requested in this case.

100In that regard, suffice it to say that that argument rather puts the cart before the horse. In order to determine whether there is a legal obligation to provide certain information under Article 27, the central question is precisely whether it is actually relevant.

101In the light of the above, I propose that the Court reject the arguments of inadmissibility put forward by the United Kingdom Government and declare the second question admissible.

(b) Substance

102As a preliminary remark, it is true that in the Direct Cosmetics II case, the Court confirmed the validity of Council Decision 85/369 — the temporary predecessor to the Derogation applicable from 1985 to 1987 — and in doing so held that ‘[the] notification made by the United Kingdom to the Commission referred in sufficient detail to the needs which the measure in question was intended to meet and it contained all the essential elements to enable the aim pursued to be identified’. ³⁹

103However, that ruling does not definitively settle the issue raised in the national court’s second question, since technically speaking it related to a previous — albeit very similar and related — derogation requested by the United Kingdom. Also, as noted by Avon, the Court did not specifically consider the sufficiency of the information from the fiscal neutrality angle.

104In any event, Article 27(2) does not in my opinion impose a requirement to provide information of the type envisaged in the referring court’s second question.

105Article 27(2) of the Sixth VAT Directive does not lay down such specific requirements expressly. I also agree with the Commission that a request for a derogation by its very nature needs to be couched, to some degree at least, in abstract terms.

106Admittedly, those elements in themselves do not preclude an implied requirement to provide specific information that would, for example, have a significant impact on the magnitude of costs involved in the derogation. However, ultimately I do not consider it necessary to discuss in detail the precise contours of the information requirement under Article 27(2).

107Avon argues specifically that the United Kingdom was under an obligation to inform the Commission either that: (i) the unregistered resellers incurred VAT on purchases of sales aids and/or other relevant inputs used for the purposes of their economic activities; or (ii) the United Kingdom’s interpretation of the Derogation was such that it was not possible to allow a direct seller a reduction for VAT incurred by the unregistered reseller on sales aids and/or other relevant inputs when calculating the output tax payable by the direct seller based on the unregistered reseller’s sale price.

108In my opinion, it was not necessary for the United Kingdom to raise either of those two points explicitly in order to comply with the requirements of Article 27(2) of the Sixth VAT Directive for a rather simple reason: both points are obvious, either inherent in the VAT system (the first point) or entirely logical and predictable in view of the scope of the requested derogation (the second point).

109In relation to the first point, it is difficult to imagine an economic operator, regardless of how marginal its activity, that does not incur any input costs related to its business. Moreover, the offsetting of input tax against output tax is such a fundamental element of the VAT system that it is certainly not an aspect that needs to be explicitly raised with the Commission.

110On the second point, the Derogation was requested and granted in relation to Article 11(A)(1)(a) of the Sixth VAT Directive. As such, and for the reasons set out above in points 50 to 54, it should have been clear to the Commission that any consideration of notional input tax under the Derogation was excluded.

Conclusion

111In the light of the above, I propose that the Court reply to the second question as follows:

When seeking authorisation for the derogation granted by virtue of Council Decision 89/534, the United Kingdom was not under an obligation to inform the Commission that unregistered resellers incurred VAT on purchases of goods used for the purposes of their economic activities.

4. Third question

112The referring court asks its third question only in the event that the answer to its first and/or second question is in the affirmative.

113Since my proposed replies to the first and second questions are in the negative, there is no need to address the third question.

V. Conclusion

114In the light of the above, I propose that the Court respond to the questions posed by the First-tier Tribunal (Tax Chamber), United Kingdom as follows:

First question

Neither the derogation authorised by Council Decision 89/534/EEC of 24 May 1989 authorising the United Kingdom to apply, in respect of certain supplies to unregistered resellers, a measure derogating from Article 11(A)(1)(a) of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes nor, subject to the referring court’s final assessment, national measures implementing that decision — to the extent that that decision and those national measures result in the imposition of VAT on the open market value of products sold via non-VAT registered resellers without taking into account irrecoverable input VAT on demonstration items or other goods and services purchased from third parties by those resellers — infringe the principles of proportionality and fiscal neutrality or Article 27(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment or Article 395 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax.

Second question

When seeking authorisation for the derogation granted by virtue of Council Decision 89/534, the United Kingdom was not under an obligation to inform the Commission that unregistered resellers incurred VAT on purchases of goods used for the purposes of their economic activities.

Third and fourth questions

In the light of the answers given to the first and second questions, there is no need to reply to the third and fourth questions.

¹ Original language: English.

² Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1).

³ Council Directive of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1).

⁴ Article 2 of the Principal VAT Directive.

⁵ Article 9 of the Principal VAT Directive.

⁶ Article 73 of the Principal VAT Directive.

⁷ Article 395 of the Principal VAT Directive. The wording of Article 395(1) of the Principal VAT Directive differs slightly and in a non-material way from that employed in Article 27(1) of the Sixth Directive.

⁸ Council Decision of 24 May 1989 authorising the United Kingdom to apply, in respect of certain supplies to unregistered resellers, a measure derogating from Article 11(A)(1)(a) of the Sixth Directive 77/388/EEC on the harmonisation of the laws of the Member States relating to turnover taxes (OJ 1989 L 280, p. 54).

⁹ See, in that sense, judgments of 19 September 2000, Ampafrance and Sanofi (C‑177/99 and C‑181/99, EU:C:2000:470, paragraph 68), and of 27 January 2011, Vandoorne (C‑489/09, EU:C:2011:33, paragraph 33).

¹⁰ That is the case for simplification measures, as has been already explicitly confirmed by the Court. See, for example, judgments of 29 April 2004, Sudholz (C‑17/01, EU:C:2004:242, paragraph 62), and of 27 January 2011, Vandoorne (C‑489/09, EU:C:2011:33, paragraph 31). However, it holds true in relation to any derogation.

¹¹ For an overview of extant derogations and the provisions they relate to as compiled by the Commission see https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/key_documents/table_derogations/vat_index_derogations_en.pdf.

¹² Judgment of 10 April 1984, Commission v Belgium (324/82, EU:C:1984:152, paragraph 29). See also judgment of 29 May 1997, Skripalle (C‑63/96, EU:C:1997:263, paragraph 24).

¹³ Judgments of 19 September 2000, Ampafrance and Sanofi (C‑177/99 and C‑181/99, EU:C:2000:470, paragraph 60), and of 29 April 2004, Sudholz (C‑17/01, EU:C:2004:242, paragraph 46).

¹⁴ Judgment of 12 July 1988, Direct Cosmetics and Laughtons Photographs (138/86 and 139/86, EU:C:1988:383, paragraph 52).

¹⁵ Above, points 40 to 41 of this Opinion.

¹⁶ 85/369/EEC: Application of Article 27 of the Sixth Council Directive of 17 May 1977 on value added tax (Authorisation of a derogation requested by the United Kingdom to enable certain types of tax evasion to be prevented) (OJ 1985 L 199, p. 60).

¹⁷ Judgment of 12 July 1988, Direct Cosmetics and Laughtons Photographs (138/86 and 139/86, EU:C:1988:383, paragraph 53).

¹⁸ Article 167 of the Principal VAT Directive.

¹⁹ Or at least the United Kingdom’s application of it.

²⁰ Judgment of 21 February 2006, Halifax and Others (C‑255/02, EU:C:2006:121, paragraph 73).

²¹ See also above the case-law cited in footnote 10.

²² Judgments of 19 September 2000, Ampafrance and Sanofi (C‑177/99 and C‑181/99, EU:C:2000:470, paragraph 60), and of 29 April 2004, Sudholz (C‑17/01, EU:C:2004:242, paragraph 46).

²³ Above, point 44 of this Opinion.

²⁴ See also in that sense judgment of 12 July 1988, Direct Cosmetics and Laughtons Photographs (138/86 and 139/86, EU:C:1988:383, paragraph 48) in relation to the predecessor of the Derogation (Council Decision 85/369).

²⁵ See judgment of 12 July 1988, Direct Cosmetics and Laughtons Photographs (138/86 and 139/86, EU:C:1988:383, paragraph 39).

²⁶ See above point 27.

²⁷ See above footnote 10.

²⁸ See, in that sense, the reference to ‘objective facts’ in the judgment of 29 May 1997, Skripalle (C‑63/96, EU:C:1997:263, paragraph 26).

²⁹ See, in that sense, judgment of 29 April 2004, Sudholz (C‑17/01, EU:C:2004:242, paragraph 63).

³⁰ See above, point 60 of this Opinion.

³¹ See, in that sense, judgment of 12 July 1988, Direct Cosmetics and Laughtons Photographs (138/86 and 139/86, EU:C:1988:383, paragraph 52).

³² Council Directive of 20 January 2004 amending Directive 77/388 concerning the common system of value added tax, as regards conferment of implementing powers and the procedure for adopting derogations (OJ 2004 L 27, p. 44).

³³ Emphasis added.

³⁴ Judgment of 27 January 2011, Vandoorne (C‑489/09, EU:C:2011:33).

³⁵ The case concerned a derogation under which VAT on cigarettes was paid up front by the manufacturer, on the basis of the expected final sales price (tax stamp). Following insolvency and failure to pay by one of its customers, Vandoorne sought reimbursement of the money paid to its supplier representing the/that VAT (technically it was not the VAT, since that had already been paid by the manufacturer but that cost had been passed down the supply chain to Vandoorne).

³⁶ Judgment of 10 November 2011, Rank Group (C‑259/10 and C‑260/10, EU:C:2011:719, paragraphs 41 and 42).

³⁷ See, in that sense, judgment of 12 July 1988, Direct Cosmetics and Laughtons Photographs (138/86 and 139/86, EU:C:1988:383, paragraph 49).

³⁸ For example, see judgment of 11 November 2015, Pujante Rivera (C-422/14, EU:C:2015:743, paragraph 20).

³⁹ Judgment of 12 July 1988, Direct Cosmetics and Laughtons Photographs (138/86 and 139/86, EU:C:1988:383, paragraph 36).