C-308/01 GIL Insurance

JUDGMENT OF THE COURT (Fifth 29 April 2004 *

In Case C-308/01,

REFERENCE to the Court under Article 234 EC Chamber)

by the VAT and Duties Tribunal, London (United Kingdom), for a preliminary ruling in the proceedings pending before that tribunal between

GIL Insurance Ltd,

UK Consumer Electronics Ltd,

Consumer Electronics Insurance Co. Ltd,

Direct Vision Rentals Ltd,

Homecare Insurance Ltd,

Pinnacle Insurance pic,

and

Commissioners of Customs and Excise,

* Language of the case: English.

on 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) and of Articles 87 EC and 88 EC,

THE COURT (Fifth Chamber),

composed of: C.W.A. Timmermans, acting for the President of the Fifth Chamber, A. Rosas (Rapporteur) and S. von Bahr, Judges,

Advocate General: L.A. Geelhoed, Registrar: M. Múgica Arzamendi, Principal Administrator,

after considering the written observations submitted on behalf of:

— GIL Insurance Ltd, UK Consumer Electronics Ltd, Consumer Electronics Insurance Co. Ltd, Direct Vision Rentals Ltd, Homecare Insurance Ltd and Pinnacle Insurance pic, D. Vaughan QC, C. McDonnell and C. Simpson, Barristers, instructed by P. Steiner and S. Ager, Solicitors,

— the United Kingdom Government, by J.E. Collins, acting as Agent, and K.P.E. Lasok QC, A. Robertson and T. Ward, Barristers, — the Commission of the European Communities, by R. Lyal and J. Flett, acting as Agents,

having regard to the Report for the Hearing,

after hearing the oral observations of GIL Insurance Ltd, UK Consumer Electronics Ltd, Consumer Electronics Insurance Co. Ltd, Direct Vision Rentals Ltd, Homecare Insurance Ltd and Pinnacle Insurance pic, represented by D. Vaughan, C. McDonnell and C. Simpson; the Kingdom of the Netherlands, represented by S. Terstal, acting as Agent; the United Kingdom Government, represented by R. Caudwell, acting as Agent, and K.P.E. Lasok; and the Commission, represented by R. Lyal and J. Flett, at the hearing on 19 June 2003,

after hearing the Opinion of the Advocate General at the sitting on 18 September 2003,

gives the following

Judgment

Legal context and the dispute

1By order of 24 July 2001, received at the Court on 6 August 2001, the VAT and Duties Tribunal, London, referred to the Court for a preliminary ruling under Article 234 EC five questions on the interpretation of Articles 27 and 33 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, 'the Sixth Directive') and of Articles 87 EC and 88 EC.

2Those questions were raised in proceedings between GIL Insurance Ltd and other companies, all incorporated in the United Kingdom, and the Commissioners of Customs and Excise (the competent authority in matters of value added tax) concerning the charging on insurance contracts connected with the provision of certain services of a tax on insurance premiums at a higher rate than that applicable to other insurance premiums.

Legal background

Community law

3Under Article 13(B)(a) of the Sixth Directive:

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

(a) insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents.'

4Article 27(1) and (2) of the Sixth Directive provides:

'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 amount of tax due at the final consumption stage.

2. A Member State wishing to introduce the measures referred to in paragraph 1 shall inform the Commission of them ...'

5Finally, under Article 33(1) of the Sixth Directive:

'Without prejudice to other Community provisions, in particular those laid down in the Community provisions in force relating to the general arrangements for the holding, movement and monitoring of products subject to excise duty, this Directive shall not prevent a Member State from maintaining or introducing taxes on insurance contracts, taxes on betting and gambling, excise duties, stamp duties and, more generally, any taxes, duties or charges which cannot be characterised as turnover taxes, provided however that those taxes, duties or charges do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.'

National law

6Under section 31 of and Group 2 of Schedule 9 to the Value Added Tax Act 1994, which transpose the provisions of Article 13(B)(a) of the Sixth Directive in the United Kingdom, supplies of insurance and related services are exempt from value added tax (VAT) in the United Kingdom.

7In 1994 a tax on insurance premiums (Insurance Premium Tax, IPT) was introduced in the United Kingdom, at the rate of 2.5% (Part III, sections 48 to 74, of the Finance Act 1994). IPT is a tax on the receipt of insurance premiums by an insurer or taxable insurance intermediary.

8Pursuant to section 21 of the Finance Act 1997, the standard rate of IPT was increased from 2.5% to 4%, and a new 'higher rate' of IPT was introduced at 17.5%.

9The standard rate applies generally. The higher rate, which corresponded at the material time to the standard rate of VAT in the United Kingdom, applies only to insurance premiums relating to domestic appliances, motor cars and travel.

10As regards travel, the higher rate applies only to travel insurance sold through travel agents. Travel insurance sold directly by insurers is subject to the standard rate. In R v Commissioners of Customs and Excise, ex parte Lunn Poly Ltd and Another [1999] STC 350 the Court of Appeal of England and Wales, Civil Division, held that the differential rates of tax on travel insurance constituted State aid within the meaning of Article 87(1) EC.

11There is no information in the case-file on the application of the higher rate of IPT to motor cars.

12As regards domestic appliances, the higher rate applies only where the insurer is connected with the supplier of the appliance, or where the insurance is arranged through the supplier, or where the supplier is paid a commission on the provision of insurance. Similar insurance sold through insurance brokers or directly by insurance companies, on the other hand, is subject to the standard rate.

13The circumstances in which the higher rate of IPT was introduced, as regards the domestic appliance sector in particular, should be described.

14IPT was introduced in 1994 to apply in principle to all insurance contracts at a single rate. The objective of such a tax was to check the trend, for suppliers of domestic appliances in particular, progressively to replace service contracts for the repair and maintenance of the appliances sold or rented, which were subject to VAT at the standard rate of 17.5%, by contracts of insurance ancillary to the contracts of sale or rental, so as to benefit from the exemption from VAT for insurance transactions.

15The introduction of IPT at a much lower rate than the standard rate of VAT did not, however, succeed in reversing the trend described above. In 1994 the great majority of insurance policies against mechanical faults in domestic appliances were sold through the suppliers of those appliances. That is known as 'connected' insurance. Only a small proportion of insurance was sold directly by insurers to consumers.

16The outcome for the tax authorities was a loss of income in terms of VAT receipts, and so in 1997 another rate of IPT was introduced, equivalent to the standard rate of VAT and applicable only to premiums received in relation to connected insurance policies. The reason given for the introduction of the higher rate was to prevent 'value-shifting', since the tax authorities considered that suppliers of domestic appliances could, by manipulating the prices attributed to the appliances and the corresponding insurance, take advantage of the exemption from VAT on supplies of insurance services.

17That measure had the consequence of a change of behaviour on the part of suppliers, who reverted to ordinary service contracts for the appliances they supplied. The proportion of direct insurance also increased.

The main proceedings and the questions referred for a preliminary ruling

18The appellants in the main proceedings ('GIL Insurance and Others') carry on business in the United Kingdom and provide insurance or related services for domestic appliances. Some of them are insurance companies. Others are rental and retail companies acting as taxable insurance intermediaries. The respondents in the main proceedings are the Commissioners of Customs and Excise, who are responsible for the administration, collection and repayment of IPT and VAT in the United Kingdom.

19GIL Insurance and Others paid the higher rate of IPT for insurance sold in connection with the sale or rental of domestic appliances. Following the previously cited judgment of the Court of Appeal in the Limn Poly case, they claimed from the respondents repayment of the amounts they had paid. Those claims were rejected. GIL Insurance and Others appealed to the VAT and Duties Tribunal.

20Before that tribunal, GIL Insurance and Others submitted that the higher rate could not be applied to them and sought repayment of the amounts paid by way of the higher rate of IPT, arguing that:

— the higher rate was a special measure which derogated from the provisions of the Sixth Directive and therefore required prior authorisation under Article 27, an authorisation which had been neither sought nor granted;

— the higher rate could be characterised as a turnover tax prohibited by Article 33 of the Sixth Directive;

— the difference between the standard rate and the higher rate of IPT constituted State aid within the meaning of Article 87 EC, which the Commission had not been informed of in accordance with Article 88 EC.

21The respondents in the main proceedings disputed those assertions.

22In those circumstances, the VAT and Duties Tribunal, London, stayed the proceedings and referred the following questions to the Court for a preliminary ruling:

'(1) Is Article 27 of the Sixth Council Directive ... to be interpreted so that the prior authorisation of the Council was required before the introduction of a higher rate of tax on insurance premiums, which tax was designed to nullify the exemption for insurance services in Article 13 of the Directive; which was at a rate identical to the standard rate of [VAT]; which was administered in the same way as [VAT]; which was intended with [VAT] to form part of an inseparable whole; and where there was no tax evasion or tax avoidance?

(2) Is Article 33 of the Sixth Council Directive ... to be interpreted so as to prevent a Member State from introducing a tax on insurance premiums which is calculated by reference to the services supplied; which is proportional to the price of the services supplied; which is charged at the final stage of sale to the consumer; which is passed on to the final consumer in a manner characteristic of [VAT] so that the burden of tax rests on the final consumer; which applies to the whole territory of the United Kingdom; but which does not apply generally to all transactions relating to goods and services?

(3) Is Article 87¹ EC to be interpreted so that an aid is to be held to affect trade between Member States only if it has, or is capable of having, an appreciable effect on trade between Member States? If so, what are the criteria for determining whether or not a measure has such an effect?

(4) Is Article 87¹ EC to be interpreted so that an aid is to be held to affect trade between Member States if as a result of that aid (1) traders in one Member State reduce the volumes of the goods they import from other Member States; or (2) a trader who rents domestic appliances to customers in one Member State has a number of its rental contracts discontinued and disposes of those appliances in another Member State; or (3) insurance companies in one Member State, which provide insurance connected with the sales of domestic appliances, are placed at a competitive disadvantage with companies which sell direct insurance some of which are subsidiaries of companies in other Member States?

(5) If, in the light of the answers to Questions 3 and 4, the higher rate of insurance premium tax constitutes a State aid within the meaning of Article 87(1) EC, is Article 88 EC to be interpreted so that, where the Commission is not informed of any plans to grant such aid, the legislative measures introducing the aid should be disapplied and any tax paid under those measures should be repaid?'

Questions 1 and 2

Question 2

23By its second question, which should be examined first, the VAT and Duties Tribunal essentially asks whether a tax on insurance premiums such as that at issue in the main proceedings is compatible with Article 33 of the Sixth Directive.

Observations submitted to the Court

24GIL Insurance and Others submit on this point that only the IPT charged at the higher rate is concerned. This is a special tax charged on the supply of insurance (and services related to insurance) where that is connected in a particular way with the supply of goods or services subject to VAT. This special tax was adopted in order to counteract the tax avoidance which the tax authorities thought was taking place. It should therefore be regarded as a separate tax from standard rate IPT, the latter being compatible with Article 33 of the Sixth Directive.

CILINSURANCE AND OTHERS

25According to GIL Insurance and Others, IPT charged at the higher rate constitutes a turnover tax prohibited by Article 33 of the Sixth Directive, since it exhibits to a sufficient degree all the essential characteristics of VAT, including that concerning general applicability.

26It is true that the higher rate of IPT does not apply to all economic transactions in the United Kingdom, since charging of it is limited to one type of transaction, namely the supply of insurance for goods and services subject to VAT. Nevertheless, IPT charged at the higher rate should be regarded as a tax of general application, in that it applies generally to insurance of a great variety of goods which constitute a substantial part of the national economy.

27GIL Insurance and Others further submit that higher rate IPT is not a tax on contracts of insurance authorised by Article 33 of the Sixth Directive. Only standard rate IPT constitutes such a tax.

28Higher rate IPT is inseparably linked with VAT. It burdens specifically the sale of insurance by retailers of domestic appliances in connection with the supply of goods subject to VAT at the standard rate. The link between the insurance and the supply taxed at the standard rate is an essential condition for levying it. Such a tax is ex hypothesi intended to have effects on the common system of VAT. Having regard to its purpose and effects, it compromises the functioning of the common system of VAT to such an extent that it must be held to be incompatible with Article 33 of the Sixth Directive.

29The United Kingdom and the Commission submit that IPT, far from constituting a turnover tax prohibited by Article 33 of the Sixth Directive, constitutes a tax on contracts of insurance expressly authorised by that very provision.

Grounds

Findings of the Court

30Contrary to the submissions of GIL Insurance and Others, the compatibility with respect to Article 33 of the Sixth Directive of a tax such as IPT should be examined as a whole, with respect to its application at both the standard rate and the higher rate, since it is a single tax with two rates.

31It is settled case-law that Article 33 of the Sixth Directive prohibits the Member States from introducing or maintaining taxes, duties or charges in the nature of turnover taxes (Case 252/86 Bergandi [1988] ECR 1343, paragraphs 10 and 11; Joined Cases 93/88 and 94/88 Wisselink and Others [1989] ECR 2671, paragraphs 13 and 14; Case C-200/90 Dansk Denkavit and Poulsen Trading [1992] ECR I-2217, paragraph 10; and Case C-28/96 Fricarnes [1997] ECR I-4939, paragraph 36).

32Taxes, duties and charges must in any event be regarded as being such measures if they exhibit the essential characteristics of VAT, even if they are not identical to VAT in all points (see, inter alia, Fricarnes, paragraph 37).

33Those characteristics are as follows: VAT applies generally to transactions relating to goods or services; it is proportional to the price of those goods or services, whatever the number of transactions carried out; it is charged at each stage of the production and distribution process; and, finally, it is imposed on the added value of goods and services, since the tax payable on a transaction is calculated after deducting the tax paid on the previous transaction (see, in particular, Bergandi, paragraph 15; Case C-347/90 Bozzi [1992] ECR I-2947, paragraph 12; and Case C-130/96 Solisnor-Estaleiros Navais [1997] ECR I-5053, paragraph 14).

34Article 33 of the Sixth Directive does not, on the other hand, preclude the maintenance or introduction of a tax which does not display one of the essential characteristics of VAT (Solisnor-Estaleiros Navais, paragraphs 19 and 20).

35In this respect, it is common ground that a tax such as that described by the national tribunal is not a general tax, since it is not intended to attach to all economic transactions in the Member State concerned (see, to that effect, Solisnor-Estaleiros Navais, paragraph 17, and Case C-208/91 Beaulande [19921 ECR I-6709, paragraph 16). IPT applies only to a specific service, the supply of insurance, since it is charged at the standard rate on the receipt of premiums in connection with contracts of insurance and at the higher rate solely on insurance premiums relating to motor cars, domestic appliances and travel where, in the case of the latter two sectors, the insurance contract possesses certain characteristics.

36In any event, it is clear that IPT is not levied at each stage of the production and distribution process, since it is charged once only, on conclusion of the insurance contract, and that it does not apply to the added value of the goods and services.

37Consequently, the answer to the second question must be that a tax on insurance premiums such as that at issue in the main proceedings is compatible with Article 33 of the Sixth Directive.

Question 1

38By its first question, the national tribunal essentially asks whether Article 13(B)(a) of the Sixth Directive, under which insurance transactions are exempt from VAT, precludes, in the case of a tax on insurance premiums such as that at issue in the main proceedings, the introduction of a special rate which is identical to the standard rate of VAT, so that the procedure provided for in Article 27 of that directive, which obliges any Member State wishing to introduce special measures for derogation from that directive to seek prior authorisation from the Council, should have been complied with before the introduction of that rate.

Observations submitted to the Court

39GIL Insurance and Others submit that the United Kingdom authorities should have asked the Council for authorisation to introduce a higher rate of IPT, pursuant to Article 27 of the Sixth Directive. Such a tax derogates from the provisions of that directive, since it was introduced in order to eliminate the consequences of the exemption in Article 13(B)(a) of that directive, with the stated aim of combating tax avoidance. It is common ground that the United Kingdom neither sought nor obtained authorisation to introduce the higher rate of IPT.

40The United Kingdom submits that the authors of the Sixth Directive must have been aware of the exemption from VAT in Article 13(B)(a) for insurance transactions. They contemplated the possibility that Member States might impose a tax such as IPT despite the exemption from VAT for insurance transactions, since Article 33 of the Sixth Directive expressly provides that the directive does not prevent the maintenance or introduction by the Member States of taxes on insurance contracts which are not turnover taxes.

41The Sixth Directive must therefore be interpreted as authorising the Member States to compensate the loss of revenue resulting from the exemption from VAT provided for in Article 13(B)(a) by applying to insurance transactions a tax other than VAT and other than any other form of turnover tax, without having to request the Council for authorisation in accordance with Article 27(1) of the directive.

42The Commission similarly considers that, as IPT does not have the character of a turnover tax, it is expressly authorised by virtue of Article 33 of the Sixth Directive and is not incompatible with the exemption from VAT under Article 13 (B)(a) of that directive. Its introduction was not therefore subject to prior authorisation in accordance with Article 27¹ of the Sixth Directive.

Findings of the Court

43While insurance services are exempt from VAT under Article 13(B)(a) of the Sixth Directive, they may be subjected to other indirect taxes, as Article 33 of that directive states, provided that those taxes do not have the character of turnover taxes. Any Member State is thus entitled, in those circumstances, to maintain or introduce a tax on insurance contracts and to lay down differential rates for that tax.

44It follows from the answer to Question 2 that a tax such as IPT does not constitute a turnover tax prohibited by Article 33 of the Sixth Directive.

45Levying it is not therefore incompatible with the exemption from VAT for insurance services provided for by Article 13(B)(a) of the Sixth Directive.

46Consequently, such a tax cannot be regarded as a measure derogating from Article 13(B)(a) of the Sixth Directive, and there was no need for the United Kingdom authorities to have recourse to the procedure under Article 27 of the Sixth Directive.

47The answer to the first question must therefore be that Article 13(B) (a) of the Sixth Directive, under which insurance transactions are exempt from VAT, does not preclude, in the case of a tax on insurance premiums such as that at issue in the main proceedings, the introduction of a special rate which is identical to the standard rate of VAT, since that tax is compatible with Article 33 of the Sixth Directive, so that the procedure provided for in Article 27 of that directive, which obliges any Member State wishing to introduce special measures for derogation from that directive to seek prior authorisation from the Council, does not have to be complied with before the introduction of that rate.

Questions 3 to 5

48By its third to fifth questions, the VAT and Duties Tribunal essentially asks the Court whether the existence of different applicable rates for a tax on insurance premiums such as that at issue in the main proceedings is liable to create distortions of competition within the meaning of Article 87(1) EC, being uncertain in particular as to the content of the criterion of effect on intra-Community trade. It asks what, if appropriate, the consequences of a possible failure to notify that measure are for taxable persons paying the higher rate of the tax.

49It should be observed that those questions are based on the assumption that the existence of two different rates for a tax such as IPT involves State aid within the meaning of Article 87(1) EC which is incompatible with Community law.

50As the Advocate General observes in point 53 of his Opinion, if such an assumption is unfounded, Questions 3 to 5 are hypothetical and there is no need for the Court to answer them.

51Consequently, before examining the third to fifth questions referred by the national tribunal, the Court must consider whether, because of the existence of two rates, the system of IPT constitutes State aid within the meaning of Article 87(1) EC.

Observations submitted to the Court

52According to GIL Insurance and Others, because of the existence of two different rates, the system of IPT must be regarded as involving State aid within the meaning of Article 87(1) EC, to the benefit of the undertakings which are subject to IPT at the standard rate.

53GIL Insurance and Others submit that they are active in fields in which there is substantial inter-State trade, namely the production and distribution of domestic appliances such as television sets and video cassette recorders and the supply of insurance covering those appliances, whether connected or direct insurance.

54The introduction of the higher rate of IPT had the effect of noticeably distorting competition in those markets, as regards both domestic appliances and insurance services. The effect of such taxation on trade between Member States was at a sufficient level to amount to State aid.

55In particular, application of the higher rate brought about a fall in the volumes of domestic appliances and spare parts purchased from other Member States. It hindered access to the United Kingdom insurance market by making it more difficult for insurance companies established in other Member States to use the easiest method of access to that market, namely the supply of connected insurance. Finally, it placed certain insurance companies at a disadvantage compared to others, which could have the consequence, if those companies belong to companies from other Member States, of affecting the financial relationship between parent company and subsidiary.

56The United Kingdom and the Commission doubt whether the existence of different rates in fact involves State aid within the meaning of Article 87(1) EC.

57The United Kingdom observes, first, that the alleged aid measure does not correspond to the general definition of a State aid, since it does not consist in a positive benefit or a mitigation of the charges normally included in the budget of an undertaking.

58The existence of two rates of IPT does not favour 'certain undertakings or the production of certain goods', in that the legislation does not impose the standard rate and the higher rate on discrete classes of taxpayers. In principle, in the context of the legislation on IPT, any insurance company could be liable at the same time to the standard rate and the higher rate and shift its business freely from one category to the other.

59Finally, it follows from the Court's case-law that an aid affects trade only where the advantage granted strengthens the position of an undertaking compared to other competing undertakings in intra-Community trade. In the present case, to assess the effect on trade of the alleged aid measure, it is necessary to examine the market of insurance for domestic appliances supplied to customers in the United Kingdom or the market of services of taxable intermediaries. The national tribunal found that GIL Insurance and Others did not operate in an intra-Community market, nor were they engaged in an activity involving intra-Community trade.

60The Commission submits that, to determine whether or not a measure constitutes State aid within the meaning of Article 87(1) EC, it must be examined whether or not it is in the nature or general scheme of the system. According to the case-law, a measure which is justified by the nature or general scheme of the system of which it forms part does not constitute State aid within the meaning of Article 87(1) EC.

61For the purpose of that examination, it should be established in the present case whether or not there exists a distortion of competition favouring certain undertakings in the insurance sector, which is subject to IPT. The selectivity of the measure should be assessed by reference to the standard rate of IPT, and it must be examined whether the specific measure constituted by the introduction of a higher rate of tax is in the nature or general scheme of the system.

62In the case at issue in the main proceedings, such an assessment should take account of the Sixth Directive for several reasons. The Commission observes, first, that that directive is a Community instrument of harmonisation which refers expressly both to a mandatory derogation for insurance services and to the possibility of introducing a tax such as IPT. It submits, next, that, in the case at issue in the main proceedings, what amounts to the same thing for the consumer may be presented either as a service contract subject to the standard rate of VAT or as an insurance contract exempt from VAT but subject to the standard rate of IPT. Finally, the Commission points out that the higher rate of IPT corresponds to the standard rate of VAT.

63An interpretation of the concept of the 'nature or general scheme of the system' suffices to enable the national tribunal to resolve the disputes pending before it. There is therefore no need to answer in greater depth the third to fifth questions.

64At the hearing the Netherlands Government submitted observations relating solely to the fifth question. It submitted on that occasion that the higher rate of IPT was not introduced to favour certain undertakings compared to others, and stressed that, unlike classic State aid situations, the higher rate does not finance the lower rate.

Findings of the Court

65In order to examine whether a system of tax such as that of IPT, because of the existence of two rates, constitutes State aid within the meaning of Article 87(1) EC, it must be examined whether such a system shows all the various constituent elements of the concept of State aid in that provision of the Treaty.

66According to settled case-law, Article 87(1) EC defines State aid, which is in principle incompatible with the common market, as aid granted by a State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, in so far as it affects trade between Member States (see Case C-126/01 GEMO [2003] ECR I-13769, paragraph 22 and the case-law cited).

67In this respect, it should be examined, first, whether the system of IPT is such as to favour undertakings offering insurance contracts subject to the standard rate in comparison with undertakings offering, in the domestic appliance sector, insurance contracts connected with the supply of those goods, which is disputed both by the Netherlands and United Kingdom Governments and by the Commission.

68Article 87¹ EC requires it to be determined whether, under a particular statutory scheme, a State measure is such as to favour 'certain undertakings or the production of certain goods' in comparison with others which, in the light of the objective pursued by the system in question, are in a comparable legal and factual situation (Case C-143/99 Adria-Wien Pipeline and Wietersdorfer & Peggaaer Zementwerke [2001] ECR I-8365, paragraph 41, and Case C-409/00 Spain v Commission [2003] ECR I-1487, paragraph 47). If that is the case, the measure concerned satisfies the condition of selectivity which is a constituent of the concept of State aid under that provision (GEMO, paragraph 35, and Spain v Commission, paragraph 47).

69The concept of aid encompasses advantages granted by public authorities which, in various forms, mitigate the charges which are normally included in the budget of an undertaking (see, inter alia, Case C-310/99 Italy v Commission [2002] ECR I-2289, paragraph 51).

70It must be observed in this respect that IPT was originally introduced as a general taxation measure applicable in principle to all insurance contracts at a single rate.

71According to GIL Insurance and Others, such a measure should be regarded as aid because of the introduction of a higher rate applicable to a determined category of insurance contracts. It gives rise to an advantage for undertakings offering contracts of insurance subject to the standard rate.

72In Adria-Wien Pipeline and Wietersdorfer & Peggauer Zementwerke (paragraphs 42 to 54) the Court held, following its case-law, that the condition of selectivity is not satisfied by a measure which, although conferring an advantage on its recipient, is justified by the nature or general scheme of the system of which it is part (see Case 173/73 Italy v Commission [1974] ECR 709, paragraph 33, and Case C-75/97 Belgium v Commission [1999] ECR I-3671, paragraph 33). It examined whether the distinguishing criterion used by the national legislation at issue in the main proceedings was justified by the nature and/or general scheme of the legislation, which would mean that the disputed measure was not in the nature of State aid.

73In the present case, even on the assumption that the introduction of the higher rate involves an advantage for operators offering contracts subject to the standard rate, it must be examined whether the application of the higher rate of IPT to a specific part of the insurance contracts previously subject to the standard rate is justified by the nature and the general scheme of the system of which that tax forms part.

74To that end, it should be observed that the national tribunal considers, in point 10 (6) of its order, that the higher rate of IPT and VAT form part of an inseparable whole, which was the aim pursued in introducing the higher rate. That rate was introduced to counteract the practice of taking advantage of the difference between the standard rate of IPT and that of VAT by manipulating the prices of rental or sale of appliances and of the associated insurance. Such conduct had given rise to a loss of income in terms of VAT receipts and to shifts in the conditions of competition in the domestic appliance sector.

75As the Advocate General suggests in point 84 of his Opinion, in view of its purpose and effect, the higher rate of IPT has the appearance of a regulatory charge intended specifically as a deterrent to the conclusion of connected insurance contracts. The introduction of a higher rate of IPT on certain contracts was not intended to confer an advantage on all operators who offer contracts of insurance subject to the standard rate of IPT, in application of the general system of taxation of insurance.

76It should be observed that standard rate IPT does not constitute a derogation from the general system of taxation of insurance in the United Kingdom. It is not a tax scheme favouring a specified sector, since it is a system of taxation of insurance premiums intended to compensate for the fact that insurance transactions are not subject to VAT.

77It follows, moreover, from the answers to Questions 1 and 2 that the system of IPT is compatible with the Sixth Directive.

78In those circumstances, even on the assumption that the introduction of the higher rate of IPT involves an advantage for operators offering contracts subject to the standard rate, the application of the higher rate of IPT to a specific part of the insurance contracts previously subject to the standard rate must be regarded as justified by the nature and the general scheme of the national system of taxation of insurance. The IPT scheme cannot therefore be regarded as constituting an aid measure within the meaning of Article 87(1) EC.

79In the light of the above considerations, there is no need to answer the third to fifth questions.

Costs

Costs

80The costs incurred by the Netherlands and United Kingdom Governments and by the Commission, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main proceedings, a step in the proceedings pending before the national tribunal, the decision on costs is a matter for that tribunal.

Operative part

On those grounds,

THE COURT (Fifth Chamber),

in answer to the questions referred to it by the VAT and Duties Tribunal, London, by order of 24 July 2001, hereby rules:

1. A tax on insurance premiums such as that at issue in the main proceedings is compatible with Article 33 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.

2. Article 13(B)(a) of the Sixth Directive 77/388, under which insurance transactions are exempt from value added tax, does not preclude, in the case of a tax on insurance premiums such as that at issue in the main proceedings, the introduction of a special rate which is identical to the standard rate of value added tax, since that tax is compatible with Article 33 of the Sixth Directive 77/388, so that the procedure provided for in Article 27 of that directive, which obliges any Member State wishing to introduce special measures for derogation from that directive to seek prior authorisation from the Council of the European Union, does not have to be complied with before the introduction of that rate.

Timmermans Rosas von Bahr

Delivered in open court in Luxembourg on 29 April 2004.

R. Grass V. Skouris

Registrar President

OPINION OF ADVOCATE GENERAL GEELHOED delivered on 18 September 2003 1

I — Introduction

1In the present case the VAT and Duties Tribunal has referred to the Court five questions for a preliminary ruling. The first two questions relate to 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 (hereinafter 'the Sixth Directive'). 2 More specifically they concern the interpretation of Articles 27 and 33 of that directive.

2The last three questions are founded on the supposition that a selective higher tax which exclusively applies to certain precisely defined economic activities may lead to distortions in competition to which Articles 87 and 88 are applicable. More specifically, those questions concern the criterion in Article 87(1) EC concerning effect on trade between Member States (Questions 3 and 4) and the consequences of non-notification of the relevant measure introducing the tax (Question 5).

3The context within which the last three questions were raised prompts a closer analysis of the scope of Articles 87 and 88 as leges speciales aimed at the prevention and elimination of distortions in competition on the Community market in so far as they stem from State aid. For if the selective tax measures at issue in the main proceedings cannot be deemed to constitute State aid, the distortions to which they give rise may be eliminated only by application of the seldom applied Articles 96 and 97 EC which, in regard to Articles 87 and 88 EC, constitute the lex generalis.

4This problem area, which was also highlighted by the Commission in its written observations, confers on this case greater legal importance than the questions raised would appear at first sight to suggest.

II — Legal framework

A — National law

5Section 31 and Group 2 of Schedule 9 of the Value Added Tax Act 1994 provide that supplies of insurance and related services are exempt from value added tax ('VAT') in the United Kingdom in accordance with Article 13 of the Sixth Directive.

6Under the Finance Act 1994, a tax on insurance premiums, the 'insurance premium tax' ('LPT'), was introduced in the United Kingdom on the receipt of insurance premiums by an insurer. The rate of the tax was originally fixed at 2.5%. By the Finance Act 1997 the standard rate was increased from 2.5% to 4% and a new higher rate of 17.5% was introduced.

7The standard rate is the generally applicable rate. The higher rate, which at the time of introduction corresponded to the standard rate of VAT in the United Kingdom, applies only to insurance premiums relating to domestic appliances, motor cars and travel.

8As far as travel is concerned, the higher rate applied only to travel insurance sold through travel agents; travel insurance sold directly by insurers was subject to the standard rate. In R v Commissioners of Customs & Excise, ex parte Lunn Poly Limited and another [1999] STC 350 the Court of Appeal of England and Wales held that the differential rates of tax in relation to travel insurance constituted a State aid within the meaning of Article 87(1) EC.

9Faced with this decision confirming the Divisional Court's earlier decision to that effect, the Commissioners of Customs & Excise in a business brief published on 24 April 1998 announced that it would not be seeking recovery by means of the retroactive application of the higher rate of tax on travel insurance sold at the standard rate. As from 1 August 1998 all travel insurance has been subject to the higher rate.

10As far as domestic appliances are concerned, the higher rate applies only where the insurer is connected with the supplier of the appliance, or where the insurance is arranged through the supplier, or where the supplier is paid a commission on the provision of insurance. Similar insurance sold through insurance brokers or directly by insurance companies is subject to the standard rate.

11The reason given for the introduction of the higher rate was to preclude 'value-shifting'. The authorities were of the view that suppliers of domestic appliances might take advantage of the absence of VAT on supplies of insurance by manipulating the prices attributed to the appliances themselves and to the corresponding insurance.

B — Community law

12Pursuant to Article 13(B) of the Sixth Directive,

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

(a) insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents;

13Article 27 of the Sixth Directive provides that 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 amount of tax due at the final consumption stage.

14Finally, Article 33(1) of the Sixth Directive provides that, without prejudice to other Community provisions, in particular those laid down in the Community provisions in force relating to the general arrangements for the holding, movement and monitoring of products subject to excise duty, the provisions of that Directive may not prevent a Member State from maintaining or introducing taxes on insurance contracts, taxes on betting and gambling, excise duties, stamp duties and, more generally, any taxes, duties or charges which cannot be characterised as turnover taxes, provided however that those taxes, duties or charges do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.

III — Facts and procedure

The dispute before the national court

15The applicants in the main proceedings are all companies incorporated and trading in the United Kingdom which provide insurance or insurance-related services for domestic appliances. Some are insurance companies (Consumer Electronics Insurance Co. Ltd, which belongs to the Thorn group, Homecare Insurance Ltd and Pin nacle Insurance pic) while others are rental and retail companies acting as taxable insurance intermediaries (GIL Insurance Ltd, UK Consumer Electronics Ltd and Direct Vision Rentals Ltd, which belong to the Granada group).

16The respondents in the main proceedings are the Commissioners of Customs & Excise who are responsible for the administration, collection and repayment of insurance premium tax ('IPT') and VAT in the United Kingdom.

17The applicants paid the higher rate of IPT in relation to insurance sold in connection with the sale or rental of domestic appliances. Following the judgment of the Court of Appeal in Lunn Poly, referred to in point 8 above, they claimed from the respondents repayment of the amounts paid by them. Those claims were rejected and they appealed to the VAT and Duties Tribunal, London.

18Before that tribunal, the applicants maintained that they were entitled to reimbursement of the amounts paid by way of higher-rate IPT, claiming that:

— the higher rate was a special measure which derogated from the provisions of the Sixth Directive and therefore required prior authorisation under Article 27, which authorisation had not been sought or obtained;

— the higher rate could be characterised as a turnover tax of a type not permitted by Article 33 of the Sixth Directive; and

— the differential between the standard rate and the higher rate constituted State aid under Article 87 EC, of which the European Commission had not been informed as required by Article 88(3) EC.

19The Commissioners of Customs & Excise disputed those assertions in the main proceedings. They accepted that an authorisation for a derogation under Article 27 of the Sixth Directive had not been sought or obtained and that the European Commission had not been informed under Article 88(3) EC of the plan to introduce the higher rate of insurance premium tax. They accepted that, if there were a breach of the Sixth Directive, then the applicants were entitled to repayment of the whole of the tax they had paid but they argued that, if the differential between the standard rate and the higher rate of IPT were an illegal State aid, then repayment of the differential was not the appropriate remedy.

part of an inseparable whole; and where there was no tax evasion or tax avoidance?

2. Is Article 33 of the Sixth ... Directive ...

20Consequently, the VAT and Duties Tribunal referred five questions to the Court for a preliminary ruling.

Questions referred

'1. Is Article 27 of the Sixth ... Directive ... to be interpreted so that the prior authorisation of the Council was required before the introduction of a higher rate of tax on insurance pre to be interpreted so as to prevent a Member State from introducing a tax on insurance premiums which is calculated by reference to the services supplied; which is proportional to the price of the services supplied; which is charged at the final stage of sale to the consumer; which is passed on to the final consumer in a manner characteristic of value added tax so that the burden of tax rests on the final consumer; which applies to the whole territory of the United Kingdom; but which does not apply generally to all transactions relating to goods and services?

miums, which tax was designed to 3. Is Article 87( 1) EC to be interpreted so nullify the exemption for insurance services in Article 13 of the Directive; which was at a rate identical to the standard rate of value added tax; which was administered in the same way as value added tax; which was intended with value added tax to form that an aid is to be held to affect trade between Member States only if it has, or is capable of having, an appreciable effect on trade between Member States? If so, what are the criteria for determining whether or not a measure has such an effect?

4. Is Article 87(1) EC to be interpreted so that an aid is to be held to affect trade between Member States if as a result of that aid (1) traders in one Member State reduce the volumes of the goods they import from other Member States; or (2) a trader who rents domestic appliances to customers in one Member State has a number of its rental contracts discontinued and disposes of those appliances in another Member State; or (3) insurance companies in one Member State, which provide insurance connected with the sales of domestic appliances, are placed at a competitive disadvantage with companies which sell direct insurance some of which are subsidiaries of companies in other Member States?

5. If, in the light of the answers to Questions 3 and 4, the higher rate of insurance premium tax constitutes a State aid within the meaning of Article 87(1) EC, is Article 88 EC to be interpreted so that, where the Commission is not informed of any plans to grant such aid, the legislative measures introducing the aid should be disapplied and any tax paid under those measures should be repaid?'

Procedure before the Court

21Those questions were submitted in an order of 24 July 2001, which was received at the Court Registry on 6 August 2001. Written observations were submitted by the applicants in the main proceedings, the United Kingdom Government and the Commission. At the hearing on 19 June 2002 they further elucidated their views. At that hearing the Netherlands Government also put forward its views.

IV — The first and second questions referred for a preliminary ruling

22The first two questions were raised in connection with the introduction of ITP. That tax was introduced in 1994, at the original rate of 2.5%. In 1997 that rate was increased to 4%. In 1999 it was again increased to 5%. In 1997 a higher rate of ITP was also introduced. That rate, 17.5%, has since remained unchanged. The higher rate was introduced in order to combat 'value-shifting', a form of tax avoidance.

23Before going into the questions I will give a brief account of the background against which they are raised.

24In regard to relatively expensive household appliances, such as audiovisual systems, washing machines and such like, consumers have the choice of rental or purchase. In the United Kingdom many consumers initially preferred the rental option. In the course of time that has changed to a preference in favour of the purchase of appliances. 3 This change in preference is linked with increasing pros perity and the improved quality of products. Developments on the market for television sets are an illustration of that. When at the beginning of the 1960s they came onto the United Kingdom market in large quantities, they were expensive in relation to disposable income, technically unreliable and required regular repairs. That was why consumers clearly opted for rental. Subsequently, television sets became relatively less expensive and their technical reliability improved drastically. As a result and owing to the development of consumer credit as a sales promotion technique, consumers progressively opted for the purchase of television sets. The same pattern of consumer behaviour became evident in the case of other household appliances.

25The initially rental-dominated market had certain specific characteristics. The rental agreements normally contained an obligation on the customer to maintain the equipment and a corresponding obligation on the rental company to service it. Both those aspects were reflected in the rental price. These arrangements were advantageous to the supplier inasmuch as the equipment remained in a good state of repair during the rental period, thus enabling it to be rented out again after expiry of the rental agreement. The advantage for the consumer was that his enjoyment of the equipment rented was assured.

26Subsequently, suppliers introduced analogous arrangements in connection with the sale of household appliances by offering service contracts. These gave customers a certain security in regard to use of the equipment. Those contracts which were ancillary to the sales and purchase agreements provided that suppliers were liable to remedy any defects in the appliance sold on payment by the customer of a fixed or annual amount.

27The supply of services under such service contracts was subject to VAT at the standard rate of 17.5%. The fact that insurance services were exempt from VAT under Article 13B(a) of the Sixth Directive prompted a number of large suppliers to offer those service contracts in the form of an insurance contract; the introduction in 1994 of the much lower IPT did not deter them from doing so. In that connection they established their own insurance companies or acted as intermediaries for insurance companies and received commission on each insurance contract taken out.

28The applicants in the main proceedings also began to offer service contracts in the form of insurance contracts. Thus, Gran ada, one of the larger suppliers of household appliances in the United Kingdom, established the GIL undertaking in order to be able through it to offer insurance contracts to its rental customers and purchasers. In the case of rentals it was even a requirement that such a contract be taken out. If defects occurred in the appliance of the insured person, GIL could ask Granada's service department to carry out the necessary repairs. The latter provided the necessary labour and spare parts.

29In 1994 the majority, that is to say 85 to 90%, of insurance contracts against mechanical defects in household appliances were sold through the intermediary of the supplier of the appliance (connected insurance). Only a small proportion of insurance contracts was sold by insurers directly to the consumer.

30It was apparent from a report from the same year that the sale of those extended warranties (service and insurance contracts) involved an annual amount of GBP 400 million the greater part of which was accounted for by insurance costs.

31The Commissioners of Customs & Excise recognised that this form of tax avoidance occasioned a loss of VAT revenue. That prompted the United Kingdom legislature to introduce a higher rate of IPT at 17.5% applicable to what is known as connected insurance contracts, that is to say where there is in some way a fixed relationship between the insurer and the supplier of the appliance concerned.

32The introduction of that higher rate had a significant effect on the market behaviour of the parties concerned. Most suppliers reverted to offering normal service contracts for the appliance supplied by them. Where insurance contracts were still taken out, direct insurance accounted for an appreciably greater market share. Insurers tied to suppliers terminated those settled relationships. The applicants in the main proceedings were also compelled to adjust their market behaviour accordingly.

Parties ' observations combat VAT avoidance. Since that was not the purpose of the introduction of the standard rate, those questions do not concern that rate;

— since higher-rate IPT on service con

33The observations of the parties to the main proceedings, on the one hand, and the United Kingdom Government and the Commission, on the other, focus on two aspects: first, the nature of (higher-rate) IPT as indirect taxation and secondly the consequences flowing therefrom for the interpretation and application of Articles 27 and 33 of the Sixth Directive.

tracts in connection with the supply of household appliances forms an inseparable part of VAT and because both taxes are mutually interchangeable higher-rate IPT must be deemed to be a turnover tax prohibited under Article 33 of the Sixth Directive;

— in the specific context in which it is

34The view of the applicants in the main proceedings may be summarised as follows:

— the first two questions concern only higher-rate and not standard-rate IPT. Higher-rate IPT was introduced on insurance arrangements directly connected with taxable supplies of goods. The purpose of that rate was to applied, higher-rate IPT displays all the essential characteristics of VAT: the tax is proportional to the price of goods and services and is ultimately borne by the end-user. The characteristic that VAT is charged at each stage of the production and distribution process and subject to deduction of input tax is less relevant in this connection since in the present case the chain, apart from reinsurance contracts, only has one link, namely the transaction between the insurer and the insured. It is true that VAT is generally applicable to transactions concerning goods and services and higher-rate IPT applies only to certain economic transactions but the comple mentarity between VAT and higher-rate IPT results in a general tax applicable to all transactions concerning household appliances to which VAT is also applicable;

— the purpose of Article 33 is to preclude the introduction of charges and taxes which by imposing a charge on the movement of goods and services in a manner comparable to a turnover tax jeopardise the functioning of the common VAT system. The negation of the effect of Article 13B(a) of the Sixth Directive, which exempts insurance services from VAT, is sufficient to demonstrate that the proper functioning of the common VAT system is being undermined;

— for the introduction of higher-rate IPT, a measure intended to combat VAT avoidance, the Sixth Directive makes provision in Article 27 for an authorisation procedure. Since the United Kingdom Government did not seek or obtain such authorisation, the introduction of higher-rate IPT runs counter to Article 27 of the Sixth Directive.

35The views of the United Kingdom Government and the Commission coincide, save in certain particular respects:

— IPT, at both the standard and higher rate, cannot be deemed to be a turnover tax in breach of Article 33 of the Sixth Directive;

— IPT does not display certain essential characteristics, as laid down in the Court's case-law. It is not of general application to transactions concerning goods and services, nor is it charged at every stage of the production and distribution procedure. It applies only to insurance contracts and is charged only once;

— Article 33 of the Sixth Directive expressly confers on the Member States the competence to introduce or apply taxes on insurance contracts provided that they are not in the nature of a turnover tax, as they are not in the present case;

— if IPT is not a turnover tax the imposition thereof is not in breach of the exemption from VAT for insurance services under Article 13B of the Sixth Directive. Therefore, no prior authorisation under Article 27(1) of the Sixth Directive is required. For that provision is applicable solely to the charge to VAT;

— the argument of the applicants in the main proceedings that the first question solely concerns higher-rate IPT is untenable. It cannot be maintained that one rate of a tax is contrary to the Sixth Directive but not another.

Assessment

36Like the United Kingdom Government and the Commission I choose to answer the second question first. The reply thereto has consequences for the reply to the first question.

Article 33 of the Sixth Directive: the legal nature of IPT

37At the outset I would point out that I cannot share the applicants' view that the questions solely concern higher-rate IPT.

38Although it is in itself correct that the questions in the main proceedings are primarily raised in connection with the higher rate and although the United Kingdom Government and the applicants are agreed that the higher rate was specifically intended to combat tax avoidance in respect of VAT in connection with service contracts in the form of insurance contracts ancillary to the rental and purchase of household appliances, the present case concerns a type of tax with two rates. It follows that in examining IPT against Article 33 of the Sixth Directive that tax must be considered as a whole in regard to all its characteristics. In that connection only two outcomes are possible: either IPT is a disguised VAT measure and therefore in breach of the Sixth Directive or it does not have the characteristics of VAT and is therefore permitted. Both outcomes apply to standard and higher-rate IPT.

39The question whether IPT must be deemed to be a turnover tax must be answered in light of the purpose of Article 33 of the Sixth Directive.

40In that connection the Court has on several occasions held that that article seeks to prevent the functioning of the common system of VAT from being compromised by fiscal measures imposed on the movement of goods and services in a manner comparable to VAT. 4 That will be the case where such fiscal measures have the essential characteristics of VAT. Thus, Article 33 expressly permits the Member States to introduce freely determined fiscal measures — including taxes on insurance contracts which are expressly mentioned in that article — as long as those taxes do not have the essential characteristics of VAT. 6

41The typical characteristics of VAT may be summarised as follows: a tax which is of general application to goods and services and is charged at every stage of the production and distribution process and is strictly proportional to the price of the goods and services concerned and is calculated on the added value subject to deduction of input tax charged at the preceding stages.

42In the case of LPT it is established that it is proportional to the price of the services concerned and is ultimately borne by the consumer. However, it is not generally applicable to transactions concerning goods and services; it is applicable only to a specific service, namely the supply of insurance services. Arguments adduced as to the applicability of that tax to the whole territory of the United Kingdom or as to the economic significance of the insurance sector do not alter the conclusion that IPT is not a general tax on consumption. On that ground alone it may be stated that IPT is not a turnover tax within the meaning of Article 33 of the Sixth Directive.

43IPT also lacks certain other characteristics typical of the VAT system. Thus IPT is not charged, as is the case with VAT, at each stage of the production and distribution process and is not charged on the added value. It is charged once only on the insurance premium on conclusion of the insurance contract. Nor, in logic, can there be any right to deduction of input tax.

44The applicants in the main proceedings have sought to suggest that IPT must nonetheless be deemed to be a turnover tax akin to VAT because, if that tax were applicable to insurance services, it could only be applied at a single stage, namely on conclusion of the insurance contract. That argument fails because it confuses the legal characteristics of VAT, which provides for a tax on the added value at each stage of the production chain, with the characteristics of a specific chain which in the present case has only one link. In my view the Commission is right to point out that the applicants' viewpoint would entail that all taxes on insurance services which are charged at a single stage only should be deemed to be turnover taxes.

45Because IPT as a system does not have the characteristics of a turnover tax, this tax on insurance contracts, which as such is expressly permitted by Article 33 of the Sixth Directive, does not generally compromise the application of the VAT system. Therefore, Article 33 does not preclude the application of IPT.

Applicability of Article 27 of the Sixth Directive

46By its first question the referring court seeks to ascertain whether prior to the introduction of higher-rate IPT the procedure under Article 27 ought to have been followed.

47Article 27 provides for the possibility that Member States, after approval by the Council, may introduce special measures for derogation from the provisions of the Sixth Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. The applicants maintain that higher-rate IPT is such a measure derogating from the Directive, in particular Article 13B thereof, because it has the effect of negating the exemption from VAT under that article for insurance contracts for certain supplies of insurance services, namely those to which higher-rate IPT applies.

48It follows from the reply to the second question that I do not share this view of the matter. If IPT (or the higher rate thereof) is not a turnover tax, the charge to that tax is not in breach of the VAT exemption for insurance services. In that case it cannot be regarded as a derogating measure.

49For the sake of completeness I would point out that although insurance services are exempt from VAT they are not immune from other indirect taxes. It is open to the Member States to introduce their own indirect taxes on insurance contracts. As stated in connection with the previous question, that is expressly stated in Article 33 of the Sixth Directive. They are not allowed to do so only in the case of a turnover tax. Since they have competence to tax insurance contracts they are also free to determine a differentiated rate of such tax, so long of course as that does not conflict with the EC Treaty provisions on freedom of movement or would result in the grant of prohibited aid. That is not altered by the fact that the higher rate of IPT is the same as the VAT rate. In other words I see no reason why the United Kingdom should not be able to introduce a differentiation in order to eliminate a distortion occurring on its domestic market.

50The applicants have further pointed to 7 the judgments in Belgium I and Belgium II. 8 The facts underlying those cases however differ from the present case. In the former case Belgium based itself for the purposes of the charge to VAT on the list price of new cars in place of the price actually agreed. The Court held that to be contrary to the Sixth Directive. The Belgian legislature subsequently brought its legislation into line but at the same time enacted a supplementary measure with a view to adjusting the scheme of the tax in such a way that nothing would change. Both were implemented by operating a certain method of computation. In the explanatory memorandum to the measure it was stated in so many words that it was a corrective measure as a result of the Court's judgment and that there was a clear connection between the charge to VAT and the levying of the registration tax. The Court went on to hold in the judgment in Belgium II that the registration tax and the charge to VAT were closely interconnected. In the present case IPT as a scheme of taxation is entirely separate from VAT. That is not altered by the fact that the higher rate was introduced in order to combat a specific form of VAT avoidance.

V — Questions concerning State aid

Preliminary observations

51In their written observations both the United Kingdom Government and the Commission submitted that they doubted whether the facts underlying the main proceedings constitute a case of State aid within the meaning of Article 87(1) EC.

52A closer study of the order for reference and more specifically the arguments inferred by the referring tribunal from the judgment of the Court of Appeal in R v Commissioners of Customs & Excise ex parte Lunn Poly Limited and another, cited at point 8 hereof, persuades me that the doubts surrounding that issue merit further attention.

53If it should transpire that the relevant facts warrant the conclusion that there is no State aid the questions raised in the present case acquire a certain hypothetical character. In that connection the question again arises as to whether they are on that ground admissible.

54In what follows I shall first examine in abstracto the interrelationship between Articles 96 and 97 EC, on the one hand, and Articles 87 and 88 EC, on the other. All those provisions share the common aim of seeking to eliminate distortions which may occur on the common market. I am prompted to do so by certain views stated by the Commission prior to its observations concerning the fifth question.

55According to the Commission there are two types of aid:

— The classic type of aid granting a specific benefit or a specific fiscal derogation. The classic remedy provided for in terms of 'eliminating the exceptional benefit' is for the Member State concerned to recover the amount of aid granted, together with interest, from the person concerned. An alternative, though not available for budgetary reasons, is to generalise the aid;

— The second type of aid is where an exceptional fiscal burden is imposed on a part of a sector. In that case the aid is eliminated by eliminating the exceptional fiscal burden. In that connection the course of action decided upon could be to pay back to the undertaking concerned the specific charge paid in order in that way to restore competition with undertakings which were not subject to it. That is the solution proposed by the applicants. However, an alternative remedy would be to generalise the specific charge and thus recover the aid from all concerned.

56The Commission adds that in regard to the second type of aid there are two options. Either the Court can for all cases in principle deny the availability of the last-mentioned solution. This approach is to be found in the Banks 9 judgment. It is also possible to leave open the possibility of such a solution, an approach which stems logically from the first part of the Ferring judgment.

57As I explain below the Commission is too ready to assume, in my view, that the cases which it describes as the second type of aid always constitute State aid within the meaning of Article 87 EC. On that view Article 87 EC would acquire a broader material scope than is warranted by the scheme of the Treaty.

Concerning distortions

58In the negotiations which preceded the coming into existence of the EEC Treaty the economic concept of 'distortion' played a much discussed role. An echo of that is to be found in the Spaak report an excerpt from which the Commission appended to its written observations.

59Substantively, discussion concerning the concept of distortion centred on the potential effects of the creation of a common market on the national economies and national economic policy.

60With the disappearance of internal economic borders Member States would also forfeit a part of their machinery with which they were hitherto able to redress imbalances in cross-border economic relations.

61Such imbalances could occur at various levels as between the different economies. At macro level global distortions manifest themselves for example in excessively high labour costs and price levels which are discernible in a deficit on current account in terms of the balance of payments. Where the opposite occurs there is an appreciable current account surplus with an over strained labour market and the threat of price inflation.

62In order to redress such global distortions in a common market the Member States must in principle have recourse to their macroeconomic policy instruments and, until the creation of EMU, monetary policy instruments. The Community competences in regard thereto were mainly of a lightly coordinating nature. They were to be found in Articles 103 to 109 of the EEC Treaty. They have now been largely replaced, as regards (financial) economic policy, by Articles 99 and 104 EC and, for uniform monetary policy within EMU, by Articles 105 to 111 EC.

63The disappearance of the economic internal borders also resulted in the occurrence of imbalances at intermediate or sectoral levels. They are mostly traceable to disparities in (systems of) legislation. Thus, a fiscal system which in country A weighs relatively heavily on the factor of employment and in country B weighs heavily on the capital factor can have a serious effect on competitive conditions within the common market. Such generic distortions, which may in principle result from all public interventions which affect the market behaviour of undertakings, may in the long run seriously disrupt the allocation processes on the common market (functioning of the common market). With a view thereto Article 100 of the original EEC Treaty provided for the possibility of harmonisation of legislation. It is not only use of the harmonisation instrument that has led within the common market to an unmistakable convergence in socioeco nomic, economic and fiscal legislation. That has also stemmed from independent initiatives by national legislatures. That spontaneous convergence has primarily occurred in the sphere of direct taxation where it has been difficult for the Community to activate its competence.

64Finally, between and within national economies imbalances may also occur in parts of sectors: these are referred to as specific distortions. They stem from specific interventions by the authorities as a result of the imposition of exceptional charges on certain kinds of production or on certain undertakings or as a result of the grant of exceptional benefits. In regard to exceptional burdens those are frequently interventions by the authorities which are known in modern management terms as burdens imposed with a view to regulating conduct. They occur more and more frequently in environmental and planning policy. In a certain sense they are the mirror image of exceptional benefits or aid which seek to influence the conduct of market participants by means of incentives rather than disincentives.

65For specific distortions the original EEC Treaty provided for two instruments. In regard to specific distortions as a result of public measures imposing a burden (the term imposing a burden must be more broadly construed than in a purely financial sense since concomitant requirements may also impose burdens), the procedures under Articles 101 and 102 of the EEC Treaty (now Articles 96 and 97 EC) were applicable. For distortions as a result of 'the grant of aid', that is to say for distortions attributable to the specific policy instrument of 'State aid', Articles 92, 93 and 94 of the EEC Treaty (now Articles 87, 88 and 89 EC) provided for a specific Community competence. That specific competence is characterised by more rigorous provisions, more thorough supervisory machinery and wide implementing and monitoring powers for the Commission.

66The major differences between the machinery of Articles 96 and 97 EC, on the one hand, and Articles 87 to 89 EC, on the other, are a reflection of a diametrically opposed application in practice. The former provisions are more or less never applied whilst the latter form the basis of a comprehensive policy practice and more and more abundant and refined decisions by the Court.

67The latter observation does not however alter the fact that, in terms of the history and structure of the Treaty, Articles 87 to 89 EC are, by virtue of the specific nature of the intervention instrument, namely the grant of State aid, to be viewed as leges speciales under the aegis of the general rules laid down in Articles 96 and 97 EC. That calls for great circumspection before a differential burden arising as a result of the imposition of an exceptional burden on a given economic activity in a part of a sector is classified without more as State aid.

Exceptional burden or State aid?

68Specific distortions as a rule result from a derogation from a general regime restricted as to subject matter or as to the persons to which the derogation applies. That derogation is in the nature either of an exceptional burden or of a specific concession having a monetary value which is directly or indirectly charged to the State.

69Normally such exceptional measures seek to influence the behaviour of market participants in a targeted way. It follows that the distortions which they create must not per se be judged negatively.

70A selective tax on cars without a catalyser creates a distortion in competitive conditions on the relevant market with a view to having a negative effect on the production and sales of such cars. Such a distortion may be justified by environmental policy objectives. Conversely, a specific grant of aid, for example in favour of certain investments in weaker regions, creates a distortion to the detriment of more prosperous regions. That specific distortion is justified by freely and generally accepted objectives of regional economic policy.

71It is clear from the wording of Articles 87 and 96 EC that specific distortions in the common market are not per se impermissible. Article 96 EC by implication confers a margin of discretion on the Commission in its determination as to whether to act against a specific distortion. That is to be inferred from inclusion of the wording: 'and that the resultant distortion needs to be eliminated'. Article 87(2) and (3) EC respectively provide for mandatory and discretionary exceptions to the general prohibition under Article 87(1).

72The major difference in legal consequences attaching under the EC Treaty to distortions stemming, respectively, from exceptional burdens or from the grant of aid calls for a careful demarcation between the two types.

73A connecting factor must always be sought in the specific source of the distortion: is it a burden or the grant of aid? The notion that a distortion created by an exceptional burden may be viewed as the grant of aid in favour of the economic operators who continue to come within the general rule is in principle incorrect on both legal and economic grounds and on policy grounds.

74It is incorrect on legal grounds because the mere introduction under a general provision not constituting the grant of aid of a higher rate restricted ratione materiae or personae would have the effect of turning that provision into the grant of aid in favour of the market participants to whom the general rule has continued to apply. Firstly, that would be to extend the substantive scope of the prohibition on State aid far beyond the limits contemplated by the framers of the Treaty; secondly, it would be to impinge on the scope of Articles 96 and 97 EC.

75From an economic point of view as well the reclassification as the grant of aid of a national measure which by its nature and purpose is general may have undesirable consequences. That could mean that the level of burden for market participants coming under the general provision would have to be brought up ex tunc to the level of burden on market participants affected by the specific measure. Such a general change in levels of burden for a large group of market participants or wide categories of market sectors may be undesirable from an economic point of view. Moreover, an adjustment of that nature in respect of a general measure incorrectly classified as State aid would almost inevitably give rise to new general distortions on the common market. Thus, one mischief would replace another.

76From a policy point of view such a change of label may have the consequence of limiting the Member States' opportunities to apply selective taxes as a policy instrument even if such application were entirely justified and could never give rise to the application of Articles 96 and 97 EC. To revert to the example given in point 70,1 consider that if the selective tax therein mentioned on environmentally unfriendly cars were to constitute the grant of aid in favour of the production and sale of environmentally friendlier cars with the consequence that the lower tax imposed on the latter cars would have to be brought up to the level of the imposition on environmentally unfriendly cars, the Member State concerned would be deprived of a policy instrument essential to it for the attainment of a generally accepted policy objective. The consequences of that per verse result are all the more serious since classification of the lower general rate in the example given as the grant of aid would remove from the Member State concerned competences conferred on it by the Treaty.

77That line of argument leads to the conclusion that a specific distortion created by an exceptional burden can never be regarded as the grant of aid in favour of the market participants coming under the general measure. In this connection two further consequences must be considered: if the relevant distortion must be eliminated in the interest of the common market the Community will have to eliminate the source of that distortion, namely the exceptional burden; in that connection it must make use of its competences under Articles 96 and 97 EC and not those under Articles 87 and 88 EC.

Facts of the main proceedings

78The application of the above reasoning to the facts of the main proceedings, as stated in points 24 to 32 hereof, produces the results set out below.

79The introduction of IPT in 1994 at a generally applicable rate of 2.5%, subsequently increased to 4% and then to 5%, must be deemed to be a general (tax) measure applicable in principle to all insurance contracts.

80The supply of other goods and services attracts VAT at the rate of 17.5%. The difference in the basis of assessment as between IPT and VAT made it attractive to disguise the supply of certain services as services under an insurance contract.

81On the market for household appliances the consequence of that was that service contracts ancillary to rental and purchase agreements were disguised as insurance contracts entered into with insurance companies linked with suppliers of those appliances.

82The consequences of that were two fold: in the first place normal service contracts were all but supplanted with the further consequence that the United Kingdom Treasury lost the VAT attributable thereto. Secondly, in this sector of the insurance market direct insurance — where the consumer takes out insurance directly with the insurer — was for the most part superseded by connected agreements whereby the supplier of the household appliance acts as intermediary.

83Those altered competitive conditions were directly attributable to the disparity between the amount of the IPT rate and the OPINION OP MR GEELHOED — CASE C-308/01 rate of VAT. Suppliers were able to take advantage of that disparity where they supplied services ancillary to the main contract by presenting them as insurance contracts.

84Higher-rate IPT is to be regarded as a specific tax restricted ratione materiae to certain types of insurance contract. From its purpose and effect, it is to be classified as a regulatory charge specifically disincentivis-ing the conclusion of those contracts. It thus had the intended effect on market conditions: the classic service contracts liable to VAT returned and on the smaller market for ancillary insurance contracts the proportion of direct insurances rose again.

85As is apparent from the proposed reply to the first two questions, this intervention was not contrary to the Sixth Directive. So long as no counter measures were adopted by the Council on a proposal by the Commission, they must be regarded as lawful. The Commission's acquiescence indicates that the possible distortion in trade between the Member States stemming from this specific tax measure was not considered serious enough to warrant action against it.

86It follows from the foregoing that that specific tax measure can in no way constitute the grant of aid possibly requiring the United Kingdom Government to repeal ex tunc this specific tax measure which was lawfully adopted and is justified as to its purpose.

87It further follows from the foregoing that the possible remedy under Articles 96 and 97 EC must be directed to the cause of the specific distortion, that is to say to the specific tax measure itself and not the generally applicable rate of IPT in regard to which the higher rate constitutes a specific exception.

88That leads me to the conclusion that, in the context of the facts underlying the main proceedings, Articles 87 and 88 EC are not applicable. Thus, Questions 3, 4 and 5 raised by the VAT and Duties Tribunal are based on a manifestly incorrect view of Community law.

89In light of that view Questions 3, 4 and 5 do not require to be answered.

VI — Conclusion

90In light of the foregoing I propose that the Court should reply as follows to the questions submitted by the VAT and Duties Tribunal:

— Question 2: Article 33 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, does not preclude the introduction of a tax on insurance premiums which is calculated by reference to the services supplied; which is proportional to the price of the services supplied; which is charged at the final stage of sale to the consumer; which is passed on to the final consumer in a manner characteristic of value added tax so that the burden of tax rests on the final consumer; which applies to the whole territory of the United Kingdom; but which does not apply generally to all transactions relating to goods and services.

— Question 1: For the introduction of a higher rate of such a tax on insurance premiums, which is compatible with Article 33 of the Sixth Directive, prior authorisation of the Council under Article 27 of the Sixth Directive is not required.

— Questions 3, 4 and 5: There is no need to reply to these questions since a specific tax measure under which a higher rate of tax restricted ratione materiae is introduced cannot be presumed to constitute the grant of aid measure within the meaning of Articles 87 and 88 EC.

Notes

(1) Original language: Dutch.

(2) OJ 1977 1. 145. p. 1

(3) It appears from the order for reference that in 1968 67.5% of television sets in the United Kingdom were rented whilst in 1998 the figure was only 8.1%. As for video recorders

(69) .6% were rented in 1979 which had fallen to a mere 4.4% by 1998.

(4) Case 295/84 Rousseau Wilmot [1985] ECR 3759.

(5) Case C-200/90 Dansk Denkavit and Poulsen Trading [1992] ECR I-2217.

(6) Case C-130/96 Solisnor-Eslaleiros Navais [1997] ECR I-

(505) 3. See also Case C-437/97 EKW and Wein & Co [2000] ECR I-1157.

(7) Case 324/82 Commission v Belgium [1984] ECR 1861.

(8) Case 391/85 Commission v Belgium [1988] ECR 579.

(9) Case C-390/98 Banks [2001] ECR I-6117.

(10) Case C-53/00 Ferring [2001] ECR I-9067.