C-416/85 Commission v United Kingdom

Judgment of the Court of 21 June 1988. - Commission of the European Communities v United Kingdom of Great Britain and Northern Ireland. - Value added tax - Zero rating. - Case 416/85. European Court reports 1988 Page 03127

Summary Parties Grounds Decision on costs Operative part

++++

1 . Action against a Member State for failure to fulfil its obligations - Objective nature - Objectives pursued by the Commision - Not to be considered

( EEC Treaty, Art . 169 )

2 . Tax provisions - Harmonization of legislation - Turnover tax - Common system of value-added tax - Reduced rates and exemptions retained on a transitional basis for "clearly defined social reasons and for the benefit of the final consumer" - Concept

( Council Directive 67/228, Art . 17, last indent, and Council Directive 77/388, Art . 28 ² )

1 . An action by the Commission pursuant to Article 169 of the Treaty against a Member State for failure to fulfil its obligations, the bringing of which is a matter for the Commission in its entire discretion, is objective in nature . In the context of the balance of powers between the institutions laid down in the Treaty, it is not for the Court to consider what objectives are pursued in such an action . Its role is to decide whether or not the Member State in question has failed to fulfil its obligations as alleged .

2 . The identification of "cleary defined social reasons" for which certain reduced rates and exemptions from value-added tax may be retained on a transitional basis pursuant to the last indent of Article 17 of the Second Directive and Article 28 ² of the Sixth Directive is in principle a matter of political choice for the Member States and can be the subject-matter of supervision at the Community level only in so far as, by distorting that concept, it leads to measures which because of their effects and their true objectives lie outside its scope .

Since, under the general scheme of value-added tax, the final consumer is the person who acquires goods or services for personal use, as opposed to an economic activity, and thus bears the tax, the second condition laid down in those provisions for the retention of certain reduced rates and exemptions, that is to say that they must be "for the benefit of the final consumer" must in the light of the social purpose of Article 17 be understood as meaning that the beneficiary must not use exempted goods or services in the course of an economic activity . The provision of goods or services at a stage higher in the production or distribution chain which is nevertheless sufficiently close to the consumer to be of advantage to him must also be considered to be for the benefit of the final consumer as so defined .

In Case 416/85

Commission of the European Communities, represented by its Legal Adviser D . R . Gilmour, acting as Agent, with an address for service in Luxembourg at the office of G . Kremlis, a member of its Legal Department, Jean Monnet Building, Kirchberg,

applicant,

v

United Kingdom of Great Britain and Northern Ireland, represented by S . J . Hay, of the Treasury Solicitor' s Department, acting as Agent, assisted by D . Vaughan, QC, with an address for service in Luxembourg at the British Embassy, 28 boulevard Royal,

defendant,

APPLICATION for a declaration that by applying a system of zero-rating to certain groups of goods and services the United Kingdom has failed to fulfil its obligations under Article 28 ² of the Sixth Council Directive of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value-added tax : uniform basis of assessment ( 77/388/EEC, Official Journal 1977, L 145, p . 1 ),

THE COURT

composed of : Lord Mackenzie Stuart, President, G . Bosco, O . Due, J . C . Moitinho de Almeida and G . C . Rodríguez Iglesias ( Presidents of Chambers ), T . Koopmans, U . Everling, K . Bahlmann, Y . Galmot, C . Kakouris, R . Joliet, T . F . O' Higgins and F . Schockweiler, Judges,

Advocate General : M . Darmon

Registrar : H . A . Ruehl, Principal Administrator

having regard to the Report for the Hearing and further to the hearing on 15 September 1987,

after hearing the Opinion of the Advocate General delivered at the sitting on 2 December 1987,

gives the following

Judgment

Legal context and the dispute

1By an application lodged at the Court Registry on 13 December 1985 the Commission of the European Communities brought an action pursuant to Article 169 of the EEC Treaty for a declaration that by continuing to apply a zero rate of value-added tax to certain groups of goods and services the United Kingdom of Great Britain and Northern Ireland has contravened the provisions of Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value-added tax : uniform basis of assessment ( Official Journal 1977, L 145, p . 1 ) ( hereinafter referred to as "the Sixth Directive ") and has therefore failed to fulfil its obligations under the EEC Treaty .

2Article 28 of the Sixth Directive lays down transitional provisions for the progressive adaptation of national legislation in certain respects . Article 28 ² provides as follows :

"Reduced rates and exemptions with refund of the tax paid at the preceding stage which are in force on 31 December 1975, and which satisfy the conditions stated in the last indent of Article 17 of the Second Council Directive of 11 April 1967, may be maintained until a date which shall be fixed by the Council, acting unanimously on a proposal from the Commission, but which shall not be later than that on which the charging of tax on imports and the remission of tax on exports in trade between the Member States are abolished . Member States shall adopt the measures necessary to ensure that taxable persons declare the data required to determine own resources relating to these operations .

On the basis of a report from the Commission, the Council shall review the abovementioned reduced rates and exemptions every five years and, acting unanimously on a proposal from the Commission, shall where appropriate, adopt the measures required to ensure the progressive abolition thereof ."

3The last indent of Article 17 of Council Directive 67/228/EEC of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes - Structure and procedures for application of the common system of value-added tax ( Official Journal, English Special Edition 1967, p . 16 ) ( hereinafter referred to as "the Second Directive "), to which Article 28 of the Sixth Directive refers, provides that Member States may :

"provide for reduced rates or even exemptions with refund, if appropriate, of the tax paid at the preceding stage, where the total incidence of such measures does not exceed that of the reliefs applied under the present system . Such measures may only be taken for clearly defined social reasons and for the benefit of the final consumer, and may not remain in force after the abolition of the imposition of tax on importation and the remission of tax on exportation in trade between Member States ".

4On the basis of Article 28 ² of the Sixth Directive, the United Kingdom has continued to apply a system called "zero-rating ". Originally Schedule 4 to the Finance Act 1972 contained a list of 17 groups of goods or services which were zero-rated . That list was incorporated almost in its entirety in Schedule 5 to the Value-added Tax Act 1983 .

5

The Commission considered that certain of the zero rates provided for by the United Kingdom legislation did not comply with the criteria contained in the last indent of Article 17 of the Second Directive; by a letter of 19 October 1981 it therefore called on the United Kingdom to submit its observations in accordance with the first paragraph of Article 169 of the EEC Treaty .

6The United Kingdom did not agree that it had failed to fulfil its obligations under the Treaty, and on 4 September 1984 the Commission therefore delivered a reasoned opinion . Since the United Kingdom did not comply with that opinion, the Commission brought these proceedings .

7Reference is made to the Report for the Hearing for a fuller account of the facts of the case, the course of the procedure and the submissions and arguments of the parties, which are mentioned or discussed hereinafter only in so far as is necessary for the reasoning of the Court .

The jurisdiction of the Court

8The United Kingdom contends that there is a political motive behind the Commission' s application to the Court and that such a motive is not a proper basis for an action pursuant to Article 169 of the EEC Treaty . The Commission' s action is intended in fact to attain by means of judicial proceedings an objective which can be achieved only by a decision of the Community legislature . It is clear from the Commission' s reply that its intention in bringing these proceedings is to bypass the procedural requirements of Article 28 of the Sixth Directive, under which it is for the Council, acting unanimously, to decide to abolish the exemptions permitted by that article . The United Kingdom therefore submits that it is not the task of the Court "to substitute itself for the political procedures envisaged by Article 28 of the Sixth Directive and to substitute an immediate obligation upon a Member State for the progressive compliance envisaged by Article 28 ".

9That argument cannot be upheld . In the context of the balance of powers between the institutions laid down in the Treaty, it is not for the Court to consider what objectives are pursued in an action brought under Article 169 of the Treaty . Its role is to decide whether or not the Member State in question has failed to fulfil its obligation as alleged . As the Court held in its judgment of 10 December 1968 ( Case 7/68 Commission v Italian Republic (( 1968 )) ECR 423 ), an action against a Member State for failure to fulfil its obligations, the bringing of which is a matter for the Commission in its entire discretion, is objective in nature .

Grounds

Substance

10It should be pointed out first of all that the Commission does not dispute the legality of the zero-rating system in general; it considers that system to be essentially equivalent to the exemptions provided for by Article 28 of the Sixth Directive, as it expressly stated in its proposal for a Sixth Directive submitted to the Council on 29 June 1973 . It submits, however, that the requirements laid down in the last indent of Article 17 of the Second Directive, which provides that exemptions may be made only "for clearly defined social reasons and for the benefit of the final consumer", are not met with regard to certain groups of goods and services included in Schedule 5 to the Value-added Tax Act 1983 .

11It must therefore be determined whether the zero-rating of the goods and services at issue complies with the conditions laid down in those provisions .

The concept of "clearly defined social reasons"

12With regard to the first condition, that is to say that exemption may be granted only for clearly defined social reasons, the parties are agreed that the determination of their own social policy is a matter for the discretion of the Member States . They accept, however, that that discretion may be subject to supervision at the Community level .

13In particular, the United Kingdom accepts that the Commission may challenge a measure where the social reason cannot be said to be sufficiently "clearly defined", where the social reason advanced cannot justify the measure or if the measure lacks all proportionality . The Commission states that by "social reasons" it understands measures which are introduced primarily for general social purposes and not principally for industrial, sectoral or fiscal reasons; it accepts, however, that it may not challenge measures taken in pursuance of a Member State' s social policy unless it can be shown that the social policy is not sufficiently clearly defined or that the measures in question either are not justified by or are disproportionate to the social reasons advanced .

14The identification of social reasons is in principle a matter of political choice for the Member States and can be the subject-matter of supervision at the Community level only in so far as, by distorting that concept, it leads to measures which because of their effects and their true objectives lie outside its scope .

The phrase "for the benefit of the final consumer"

15The Commission regards as "final consumers" those persons who stand at the final stage in the manufacturing and commercial chain and have no right to deduct VAT, that is to say non-taxable persons .

16The United Kingdom considers that there is nothing in the general scheme of VAT to indicate that the term "final consumer" should be treated as synonymous with the term "non-taxable person ". On the contrary, the final consumer must be taken to be the natural or legal person at the end of a particular production or distribution chain for a particular product or service, even where that product or service is used in the production of other products or the provision of other services, regardless of whether or not the person is a taxable person .

17Under the general scheme of VAT the final consumer is the person who acquires goods or services for personal use, as opposed to an economic activity, and thus bears the tax . It follows that having regard to the social purpose of Article 17 the term "final consumer" can be applied only to a person who does not use exempted goods or services in the course of an economic activity . The provision of goods or services at a stage higher in the production or distribution chain which is nevertheless sufficiently close to the consumer to be of advantage to him must also be considered to be for the benefit of the final consumer as so defined .

The zero rates at issue

A - Group 1 - Food ( 2 . Animal feedingstuffs; 3 . Seeds or other means of propagation of plants comprised in Items 1 or 2; 4 . Live animals of a kind generally used as, or yielding or producing, food for human consumption )

18The Commission' s allegation is essentially that the zero-rating of these products does not comply with the second condition laid down in the last indent of Article 17 of the Second Directive . It submits that transactions in these products are too remote from the final zero-rated food product to fulfil the criterion of benefit to the final consumer .

19The United Kingdom argues that the application of a positive rate of VAT to these products would entail an increase in food prices and thus jeopardize the achievement of the social objectives which it is pursuing . It also disputes the Commission' s argument concerning remoteness from the final product .

20All the supplies at issue contribute to the production of substances intended for human consumption and are sufficiently close to the final consumer to be of advantage to him . Moreover, the negative effects of any taxation of those products on food prices, increases in which are particularly sensitive for the final consumer, who himself enjoys zero-rating, cannot be neglected .

21It follows that with regard to the products of this group at issue the alleged failure of the United Kingdom to fulfil its obligations has not been established .

B - Group 2 - Sewerage services and water supplies

22The Commission' s submission in this respect concerns services provided to industry regarding the emptying of cesspools and septic tanks made necessary by the absence of a mains drainage system, on the one hand, and the supply of water to industry, on the other .

23In neither of these cases can the provision of services to industry be regarded as fulfilling the second criterion laid down in Article 17, since industrial users cannot be regarded as final consumers .

24With regard in particular to the supply of water to industry, the United Kingdom pointed out that such supplies are exempted in another Member State . In the course of the proceedings the Commission explained that that exemption is based on Article 28 ³ ( b ) of the Sixth Directive, according to which the Member States may, during the transitional period, continue to exempt the activities set out in Annex F, in this instance "the supply of water by public authorities ". The United Kingdom has not sought to rely on that provision .

25The failure of the United Kingdom to fulfil its obligations in respect of these products and services is therefore established .

C - Group 6 - News services provided to certain undertakings

26The Commission' s submissions concern the supply of news services to undertakings which themselves provide services which are not zero-rated, such as banks or insurance companies .

27The United Kingdom argues that the services in question can be included as an "incidental benefit" and that the intrinsic characteristics of news services remain the same whether they are supplied to a bank or to a newspaper, the latter being zero-rated .

28Leaving aside the fact that an incidental benefit such as that relied on by the United Kingdom has no place in the concept of a benefit to the final consumer for the purposes of Article 28 of the Sixth Directive, it is clear that since the undertakings to which the news services in question are provided, such as banks and insurance companies, cannot be regarded as final consumers, the second criterion laid down in Article 17 of the Second Directive is not fulfilled .

29The failure of the United Kingdom to fulfil its obligations in respect of these services is therefore established .

D - Group 7 - Fuel and power ( coal, coke, coal gas, water gas, petroleum gases, fuel oil, gas oil, electricity, etc .)

30The Commission challenges the zero-rating of supplies of fuel and power other than to final consumers .

31In its defence the United Kingdom relies essentially on the negative effects from the social point of view of any taxation of supplies of fuel and power, in particular to schools and hospitals .

32Whilst the Court does not call in question the social reasons underlying that policy, it must point out that the services in question cannot be considered to have been provided for the benefit of final consumers, since final consumers as defined above derive only very indirect advantages from zero-rating . They therefore do not fulfil the second criterion of Article 17 of the Second Directive .

33With regard to the United Kingdom' s alternative argument to the effect that the difficulties in administering the tax if only supplies to final consumers were zero-rated would probably be insurmountable, it must be observed that where a Member State wishes to make use of the derogations in question it must take all the practical measures necessary for the correct application of those provisions . If it considers that such measures cannot be implemented, it must refrain from applying zero rates .

34The alleged failure of the United Kingdom to fulfil its obligations is therefore established .

E - Group 8 - Construction of buildings ( including in particular the initial sale of new buildings, the services provided by a contractor constructing a new building for a client who owns the site, the construction of commercial and industrial buildings, civil engineering works, the construction of roads, railways and airports )

35The Commission challenges the zero-rating of all the items in Group 8 with the exception of housing constructed by local authorities . With regard to the housing sector, the Commission argues that the indiscriminate application of a zero rate to the whole sector, regardless of the nature of the dwellings concerned, is contrary to the first criterion laid down in the last indent of Article 17 inasmuch as it is disproportionate in relation to the objectives of the United Kingdom' s social policy in housing matters . With regard to commercial and industrial buildings and to community and civil engineering works the Commission considers that any benefit to the final consumer is too remote to meet the second criterion laid down in the last indent of Article 17 .

36With regard to buildings intended for housing, the Commission' s arguments cannot be upheld . The measures adopted by the United Kingdom in order to implement its social policy in housing matters, that is to say, facilitating home ownership for the whole population, fall within the purview of "social reasons" for the purposes of the last indent of Article 17 of the Second Directive .

37By applying a zero rate to the activities comprised by Group 8 with regard to housing constructed both by local authorities and by the private sector, the United Kingdom has not, therefore, contravened the last indent of Article 17 of the Second Directive .

38However, activities included in Group 8 in relation to the construction of industrial and commercial buildings and to community and civil engineering works cannot be considered to be for the benefit of the final consumer .

39It follows that the United Kingdom has failed to fulfil its obligations, as alleged by the Commission, in so far as it applies a zero rate to services in relation to the construction of industrial and commercial buildings and to community and civil engineering works .

F - Group 17 - Clothing and footwear

40The Commission submits that the supply of these products to employers for the use of their employees cannot benefit from zero-rating because they cannot be regarded as inputs in the chain of production of products which are zero-rated .

41The United Kingdom argues that protective boots and helmets must be considered in their own right, not as part of a production process . The employer must, it says, be regarded as the final consumer of these goods .

42In the light of the considerations set out above, it must be held that the persons to whom these goods are supplied cannot be regarded as final consumers .

43The alleged failure of the United Kingdom to fulfil its obligations in this respect is therefore established .

44It follows from all the foregoing that by continuing to apply a zero rate of value-added tax to the groups of goods and services specified above, the United Kingdom has contravened the provisions of Directive 77/388 and has therefore failed to fulfil its obligations under the EEC Treaty .

Costs

Costs

45Under Article 69 ² of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs . Since the United Kingdom has failed in most of its submissions, it must be ordered to pay the costs .

Operative part

On those grounds,

THE COURT

hereby :

¹ Declares that by continuing to apply a zero rate of value-added tax

to supplies to industry of water and sewerage services ( emptying of cesspools and septic tanks ) included in Group 2 of Schedule 5 to the Value-added Tax Act 1983, in so far as they are not supplied to final consumers,

to news services included in Group 6, in so far as they are not provided to final consumers,

to supplies of fuel and power included in Group 7 and to protective boots and helmets included in Group 17, in so far as they are not supplied to final consumers,

to the provision of goods and services included in Group 8 in relation to the construction of industrial and commercial buildings and to community and civil engineering works, in so far as they are not provided to final consumers,

the United Kingdom of Great Britain and Northern Ireland has contravened the provisions of Council Directive 77/388 of 17 May 1977 and has therefore failed to fulfil its obligations under the EEC Treaty;

Signatures

² For the rest, dismisses the application;

³ Orders the United Kingdom to pay the costs .

OPINION OF MR ADVOCATE GENERAL DARMON delivered on 2 December 1987 * Mr President, Members of the Court,

1This action against the United Kingdom for failure to fulfil its obligations concerns the criteria for the application of Article 28 (2) of the Sixth Council Directive of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes (77/388). 1 The essence of the claim is that the United Kingdom applies to a number of goods and services a 'zero rate' which is not justified for 'clearly defined social reasons and for the benefit of the final consumer', as required by the last indent of Article 17 of the Second Council Directive of 11 April 1967, 2 to which Article 28 (2) of the Sixth Directive refers.

2That provision was adopted as part of a process initiated in 1967, when the first two directives on the harmonization of legislation concerning turnover taxes 3 were adopted; it should be noted that in the United Kingdom these taxes have never been as important as they were in the

* Translated from the French.

3138 original Member States of the Community, nor have they taken the same form, that of a cumulative multi-stage tax. Although 'the rates and exemptions [were] not harmonized at the same time' 5 the result was the establishment of a 'general tax on consumption'. 6 The Sixth Directive, adopted 10 years later, had as its aim an essential objective, the creation of 'own resources' for the Communities, which were to include 'those accruing from value-added tax and obtained by applying a common rate of tax on a basis of assessment determined in a uniform manner according to Community rules'. 8

3'So that the Communities' own resources may be collected in a uniform manner in all the Member States' 9Articles 13 to 16 of the directive lay down a list of exemptions common to all the Member States. However, on a transitional basis Article 28 of the directive allows them to retain, under certain conditions, inter alia the reduced rates and exemptions which were in force on 31 December 1975 and satisfy the criteria set out in the last indent of Article 17 of the Second Directive (hereinafter referred to as 'Article 17'). That possibility was left open on the ground that it was 'vital to provide for a transitional period to allow national laws in to be specified fields gradually adapted'.

4Although it was adopted on the basis of Article 28 (2), the system of zero-rating at issue differs from the exemption mechanism provided for in that article. That is to say, Article 28 provides for exemption 'with refund of the tax paid at the preceding stage' which takes effect at the retail stage. At earlier stages every taxable person as defined in Article 4 of the directive must apply the tax. Only a retailer who sells an exempted product to a 'final consumer' does not pass on the VAT which he has paid but obtains a refund from the. tax authorities. The zero-rating system takes a different approach. A list of goods and services designated by the national legislature is subject to purely notional taxation, under which no VAT is actually charged either on delivery or at earlier stages in the marketing chain. Naturally, there is nothing to refund to the retailer. According to the Commission, some 35% of the private consumption of households is zero-rated in the United Kingdom and 33 % in Ireland; Ireland disputes that percentage and states that the real figure is 25%. The zero-rating technique exists in three other States, but they operate it only on a very small scale, largely in favour of the press.

5Let me state right away that the system itself is not challenged by the Commission, which considers it to be equivalent to the system of exemption and refund. However, the Commission disputes the application of zero-rating to certain categories of goods and services 11 in the list contained in the Value-added Tax Act 1983. It considers that those provisions do not comply with the criteria laid down in Article 17. While it admits that zero-rating has no effect on own resources, it states that 'in the context of the completion of the internal market, of the abolition of fiscal frontiers and of the drive towards a standardization of the rate of VAT ... ' its aim is to 'limit the use of zero rates to those transactions which meet the criteria laid down in Article 28 (2) of the Sixth Directive and this as part of its overall fiscal policy of working towards the total phasing out of all zero rates or exemptions with refunds.'

6According to the Commission, in determining how far up the commercial chain zero-rating may be applied if it is to benefit the final consumer, only stages corresponding to inputs' in the 'bona fide production or distribution of a final product which may be exempted in accordance with the criteria laid down in Article 28 (2) may be taken into account. The Commission further argues that only the person who acquires the goods or services without having any right of deduction may be regarded as the final consumer.

7The United Kingdom disagrees with that definition, and submits that the final consumer is the person at the end of a production or distribution chain. Moreover, it is not necessary that it should 'only' be the final consumer who benefits, or that he should benefit directly. It is sufficient if he gains an indirect benefit from the transaction, in particular by way of a lower end price. The United Kingdom points out that it enjoys considerable discretion in determining its own social policies and hence in deciding on the national measures to be taken for 'clearly defined social reasons'. The Commission does not deny that such a prerogative exists, but it submits that the Court, exercising its supervisory power, should hold that in this case those measures are unjustified or disproportionate in relation to the social reasons relied on, and that the meaning of that concept for Community purposes must be defined by the Court.

8The United Kingdom complains more generally, however, that what the Commission is really doing is using an action against it for alleged failure to fulfil its obligations in an endeavour to evade the provisions of Article 28 according to which it is for the Council, acting unanimously, to decide to abolish the exemptions permitted by that article. That analysis, it says, is illustrated by the terms used by the Commission, from which it appears that the application of zero rates constitutes one of the 'stumbling blocks' on the path towards a uniform rate of VAT. The United Kingdom considers that its assessment of the Commission's real motive is supported by the fact that the Commission accepts that the zero-rating in question has no bearing on own resources because of the mechanism established by the last sentence of the first subparagraph of Article 28 (2), which requires that 'taxable persons declare the data required to determine own resources' relating to exempted operations. The United Kingdom also argues that when it instituted these proceedings the Commission had not yet submitted to the Council a proposal for progressive abolition as provided for in that article. It may be noted in that regard that

3140 such a proposal was submitted while these proceedings were in progress. 1

9Let me say right away that these objections concerning the Commission's possible motives for bringing the action do not seem relevant to the role of the Court. It scarcely needs pointing out that the decision whether or not to bring an action against a Member State for failure to fulfil its obligations is in any event in the entire discretion of the Commission, as the custodian of the Treaties, and that it is for the Commission 'to judge at what time it shall bring an action before the Court'. 1 Moreover, the role of the Court in proceedings of this kind is to determine whether or not a Member State has failed to fulfil its obligations towards the Community as defined by the law in force. It should be recalled in that regard that in Parliament v Council, where the Council contended that the Parliament was using the action for failure to act as a means of furthering political objectives, the Court held that:

'It is not possible to restrict the exercise of that right [to bring an action for failure to act] by one of them [the Community institutions] without adversely affecting its status as an institution under the Treaty'. 4

Rejecting the objection of inadmissibility raised in that respect by the Council, the Court followed the Opinion of the Advocate General, who had stated:

'It is not for this Court to decide whether the action has political objectives. An action is being prosecuted before the Court according to the rules of procedure on a question of law, namely the scope of the duties of a Community institution. The action will be decided according to the relevant provisions, namely those of the Treaty establishing the European Economic Community of 25 March 1957. It is prosecuted in the interests of the Community and its legal system for the purpose of obtaining a binding ruling on the scope of the rights and obligations of the parties'. 5

Such statements of principle, emphasizing the objective nature of actions brought before the Court, make possible a correct assessment of the weight of the arguments submitted in that respect by the United Kingdom. Although the Commission did refer in rather general terms to the interests which it considered to be at issue in this case, the fact remains that its action is directed unambiguously at a failure to comply with Article 28 of the Sixth Directive in conjunction with Article 17 of the Second Directive. It is obviously on the basis of those provisions alone that the Court can determine whether or not the United Kingdom has failed to fulfil its obligations, since although the Sixth Directive states expressly that it is for the Council to abolish the exemptions established under Article 28, their retention until such abolition depends on their conformity with that provision. The next step must therefore be to examine that issue.

— I Measures taken for clearly defined

social reasons and for the benefit of the final consumer

10Let me emphasize right away that 'clearly defined social reasons' and 'benefit of the final consumer' are not alternative conditions. One of them concerns the objective of the measures in question, the other its beneficiaries. They are therefore cumulative. Moreover, a provision creating an exception to the rules on the uniform basis of assessment for VAT cannot be construed liberally.

A — 'Clearly defined social reasons'

11The parties are agreed that the determination of their own social policy is a matter for the discretion of the Member States. The Commission considers, however, that it is for the Court to lay down a definition for Community purposes of the phrase 'clearly defined social reasons' and that the Court should hold that in this case the measures adopted are not sufficiently well defined or are unjustified or disproportionate in relation to the reasons relied on.

12The application of zero-rating may result in a reduction of the tax burden on the least well off segments of society. It is equally conceivable, however, that the Member States should also use fiscal instruments in order better to satisfy the needs of the great majority of the population. With regard to the concept at issue, moreover, I do not think that it is the role of the Court to review the expediency of choices made by the Member States. With reference to the 'public morality' exception to the rules on the free movement of goods, the Court has held that:

'In principle, it is for each Member State to determine in accordance with its own scale of values and in the form selected by it the requirements of public morality in its territory'.

I propose that the Court take the same approach in this case. That is to say, if it is accepted that the Member States can restrict that fundamental freedom in the manner described, it must be possible to accord them, without thereby endangering to any greater extent the consistency of the Community legal system, a similar latitude with regard to provisional exceptions to rules establishing a uniform basis of assessment for VAT.

13However, compliance with the directive in question requires that the Court should be able to intervene in the event that the exercise by the Member States of their powers in the matter, where it has no relation to the field at issue, might frustrate the Community provision itself. I therefore suggest that the Court should declare measures contrary to Community law only where their objective is clearly unrelated to the satisfaction of the fundamental needs, be they individual or collective, of the population of the Member State.

B — The final consumer

14In my view the final consumer must be defined as the person who acquires goods or services for his personal use, as opposed to an economic activity, which Article 4 of the directive uses as the criterion for determining who is a taxable person. The distinction between a taxable person and a final consumer lies in the fact that a taxable person carries out transactions for consideration, while a final consumer is one who acquires goods or services for his own use. That distinction has fundamental consequences for tax purposes: in principle a taxable person deducts VAT, whereas a final consumer must bear that tax 'unless there is a further transaction in which a price is paid'. That consequence cannot be

3142 ignored in the case of a zero rate. In such a case the final consumer is the person who would have to bear a positive tax and would not be able to deduct it. That definition is not, I think, based on a narrow approach; it corresponds strictly to a fiscal interpretation, the only one which, in the context of provisions on VAT, is appropriate to the categories relevant to such taxation. It is, moreover, that which appears in Article 3 of the proposal for a 16th VAT directive:

'For the purposes of this directive:

(a) "final consumer" means:

(1) any person who, with regard to the importation of goods referred to in Article 2, is not deemed to be a taxable person within the meaning of Article 4 of Council Directive 77/388/EEC,

(2) a taxable person who was not entitled to deduct value-added tax when purchasing goods.'

C — 'For the benefit' of the final consumer: the concept of a benefit

15It remains for me to consider the concept of a 'benefit' as used in Article 17, where it speaks of exemptions 'for the benefit of the final consumer'. In the case of a 'normal' exemption, such a benefit results from the non-application of VAT at the retail stage. In essence, the benefit is entirely identical under the zero-rating system: the consumer pays no VAT. The application of zero-rating at earlier stages of distribution results in no additional fiscal benefit for the consumer since he does not pay the tax in any event. However, as the Commission says, zero-rating may be accepted higher in the commercial chain in so far as it is applied to the product itself which is zero-rated on purchase by the final consumer.

16Can we go further and take into account the indirect benefit which, according to the United Kingdom, results from the application of zero-rating to inputs used to produce goods which are themselves zero-rated? It should be emphasized that from the fiscal point of view such a benefit does not exist once a zero rate is applied on purchase by the final consumer. That is to say, the extension of a zero-rating higher up the commercial chain has no effect on the fiscal burden on the consumer, who in any event benefits from a zero rate. The only benefit for him, therefore, lies in a possible reduction in the cost of the product resulting from a reduction in cash outlays and overheads in the absence of positive rates of tax on the inputs concerned. I think, however, that these consequences, which are revealed by an economic analysis, should be regarded with prudence in so far as they vary according to the time-limits for deductions, the size and structure of the producers or dealers in question, credit arrangements between them, etc. The complexity of such effects requires, in my opinion, a degree of caution in that respect in considering the notion of a 'benefit' for the final consumer for the purposes of Article 17. However, in so far as the very existence of a reduction in production costs is likely to result in a benefit, albeit variable, for the final consumer, I propose that the Court should not reject, as a matter of principle, the zero-rating of inputs which are directly and exclusively used in a product which itself is properly zero-rated.

17Now that the conditions laid down in the provision at issue have been defined, we may determine whether or not the contested measures comply with them.

—

II The contested zero rates

A — Group 1 of the list set out in Schedule 5 to the Value-added Tax Act 1983 —Food

18At issue is the application of zero rates to animal feedingstuffs, seeds or other means of propagation of plants, and live animals used as, or yielding or producing, food for human consumption. These are all inputs used in the production of food for human consumption, and there is no dispute as to the application of zero rates to food. The United Kingdom argues that the application to them of zero rates is of direct benefit to final consumers who themselves use those inputs to produce food. It refers more generally to the reduced burden on farmers' cash-flow and its possible effects on food prices.

19Although this last consideration must be approached with caution, as I have already stated, the negative effects of any taxation of those products on food prices, increases in which are particularly 'sensitive' at the level of the final consumer, cannot be ignored. It should be observed that all the supplies referred to contribute directly and exclusively to the production of food for the final consumer. Moreover, persons using such supplies to produce their own food and farmers keeping part of their production for the use of their family receive a direct benefit from the application of the zero rates at issue. I therefore propose that the Court hold that the United Kingdom has not failed to fulfil its obligations in this respect.

B — Group 2 — Sewerage services and water supplies

20Sewerage services (reception, disposal or treatment of sewage and emptying of cesspools, septic tanks, etc.) are normally financed by a rate which is not subject to VAT. Consequently, taxable commercial services are provided only in respect of cesspools or septic tanks which are made necessary by the absence of any main drainage system. The United Kingdom justifies the application of zero rates to such services essentially for reasons of equity between town-dwellers and isolated farmers, who are generally the beneficiaries of the measure in question. There are also, it maintains, domestic considerations justifying exemption. The Commission, in any event, disputes only the supply of such services to industry. Since the United Kingdom states that it is highly unlikely that industrial concerns would make use of such services, I agree with the Commission that the repeal of the disputed provision — since industrial concerns cannot be regarded as final

3144 consumers — should not present any difficulty.

21With regard to the supply of water, only supplies to industry are in dispute; while the United Kingdom admits that the industrial sector is the largest consumer, it argues that in certain cases water is used principally for the benefit of the individual in the preparation of food and drink. In its view there is, moreover, no practical reason for attempting to identify the status of the final consumer, since water is connected in the public mind with food and should be treated in the same way by analogy.

22That argument cannot be upheld. Industrial uses of water are important enough to preclude, so it seems to me, the application of zero rates, in the light of the fact that the users are taxable persons. All I would allow, following the Commission's view, is the application of a zero rate for the industrial production of finished food products. The United Kingdom did point out that there is an exemption for supplies of water in another Member State. The Commission observed that that exemption was based on Article 28 (3) (b) of the Sixth Directive, under which Member States may, during the transitional period, continue to exempt the activities set out in Annex F, inter alia 'the supply of water by public authorities'. The United Kingdom, which based its contentions expressly on Article 28 (2), has not argued that it could rely on Article 28 (3) (which to my mind is strictly alternative to Article 28 (2)) or even asserted that it met the conditions laid down in the latter. I therefore think that the United Kingdom has failed to fulfil its obligations in this respect.

C — Group 6 — News services

23Since the Commission has accepted that zero rates may be applied in respect of the supply of information directly to the public or to undertakings which use that information in the production of products such as newspapers, it seems that it is only the application of zero rates to the supply of information — essentially by electronic means — for other business uses that remains at issue. Such beneficiaries of zero-rating (banks, insurance companies, etc.) cannot be regarded as final consumers.

D — — Group 7 Fuel and power

24The Commission contests the exemption of supplies other than to final consumers. The United Kingdom argues first of all that in the case of mixed users it is difficult to distinguish between business uses and private uses. Such an objection is unconvincing, and it is for the Member States to find appropriate technical solutions to what does not appear to be an insurmountable difficulty. Secondly, it argues that the taxation of such supplies in the education and health sectors would have undesirable social effects. Having regard to the very large energy consumption of the industrial sector it is clear that zero rates do not benefit the final consumer in this area; the Commission's claim must therefore, in my opinion, be upheld in this respect.

E — Group 8 — Construction of buildings, etc.

25This is certainly the most important group of exemptions from the economic point of view since it covers the housing sector, industrial and commercial buildings, and the community and civil engineering sector. The Commission considers that the failure to distinguish according to the type of housing concerned is disproportionate having regard to the objectives pursued. The United Kingdom argues that it is very difficult to distinguish, as the Commission suggests, between housing constructed by local authorities, which unquestionably qualify for exemption, and other housing, especially since it is now the private sector which, because of the steps taken to encourage home ownership, provides an increasing proportion of housing for the most disadvantaged segments of the community.

26If it was for the Court to consider whether or not the decision to apply a zero rate in respect of the construction of all private housing was well founded, it could undoubtedly hold that measures of such an indiscriminate nature reflect a very wide view of the social reasons relied on. As I have already said, however, the exercise of such a supervisory role would impinge on the powers of the Member States. In any event, the approach adopted by the United Kingdom, that is to say, facilitating home ownership for the whole population, clearly does not go beyond the discretion which it undoubtedly retains in this field.

Conclusion

27In the industrial and commercial sector zero-rating is used by the United Kingdom as a means of encouraging renewal of infrastructure and construction, especially from the point of view of employment. I do not share the Commission's reservations with regard to the social reasons put forward. The improvement of industrial infrastructure, the development of residential areas and, above all, the quantitative and qualitative effects of such development for employment are clearly important social reasons. However, I must propose that the Court hold that the United Kingdom has failed to fulfil its obligations in so far as the zero rates at issue, although undoubtedly benefiting workers, users and citizens, cannot be regarded as benefiting the final consumer as defined in the directive. To treat the entire population as the final consumer does not seem to me to be compatible with a provision which clearly concerns a person who acquires goods or services for his own use. Moreover, such a wide interpretation of the term 'final consumer' would amount to the de facto removal of the condition laid down in that

30 I therefore propose that the Court: respect by the relevant provision, and allow any exemption based on social reasons.

28With regard to community works and civil engineering, I am inclined, for reasons similar to those I have just set out, to adopt the same approach. Here again, despite the social aspect of the reasons put forward, it is hard to see any distinction between the final consumer and the population as a whole.

F —Group 17— Clothing and footwear

29The zero-rating of purchases of such supplies by employers is said to be justified by the fear that taxation would discourage them from providing such equipment for their staff. I need simply point out that the beneficiary cannot be regarded as a final consumer according to the definition I have adopted. It may be added that it appears from the United Kingdom's pleadings themselves that many employers should be able to recover the tax on such supplies.

(1) hold that by applying zero rates of VAT :

to supplies to industry of water and sewerage services,

to information services other than those intended directly for the public or for the production of zero-rated products such as newspapers, to the construction of buildings for industrial and commercial use and in the community and civil engineering sector, to supplies of fuel and power and of protective boots and helmets in so far as they are not supplied to the final consumer, the United Kingdom has failed to fulfil its obligations under the EEC Treaty and under Article 28 (2) of the Sixth Council Directive of 17 May 1977 (77/388); (2) dismiss the remainder of the application;

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

Notes

(1) 'Common system of value-added tax: uniform basis of assessment', OJ L 145, 13.6.1977, p. 1.

(2) Directive 67/228 — 'Structure and procedures for application of the common system of value-added tax' (hereinafter referred to as VAT). Official Journal, English Special Edition 1967, p. 16, hereinafter referred to as 'the Second Directive'.

(3) First Council Directive of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes (67/227), Official Journal, English Special Edition

(196) 7, p. 14; Second Directive, cited above.

(4) J. C. Scholsem, 'La TVA, impôt européen' in Mélanges Fernand Dehousse, Vol. II, p. 305.

(5) Eighth recital in the preamble to the First Directive.

(6) Article 2 (1) of the First Directive.

(7) The third, fourth and fifth directives merely delayed the introduction of the common VAT system.

(8) Second recital in the preamble to the directive; my emphasis.

(9) Eleventh recital in the preamble to the directive.

(10) Nineteenth (last) recital in the preamble to the directive; my emphasis.

(11) Disputed zero rates : Group 1 — Food (animal feedingstuffs, seeds, live animals of a kind generally used as, or yielding or producing, food for human consumption); Group 2 — Sewerage services and water (supplies to industry) ; Group 6 — News services (supplies to industry); Group 7 — Fuel and power (supplies to industry); Group 8 — Construction of buildings, etc. other than by or for the final consumer within a social policy; Group 17 — Clothing and footwear (protective boots and helmets sold to employers).

(12) OJ C250, 18.9.1987, p. 2.

(13) Judgment of 10 December 1968 in Case 7/68 Commission v Italy [1968] ECR 423.

(14) Judgment of 22 May 1985 in Case 13/83 [1985] ECR

(151) 3, at p. 1556, paragraph 17.

(15) Opinion of Mr Advocate General Lenz delivered on 7 February 1985 in Case 13/83, cited above, [1985] ECR

(151) 5, at p. 1518.

(16) Judgment of 14 December 1979 in Case 34/79 Regina v Henn and Darby [1979] ECR 3795.

(17) Judgment of 1 April 1982 in Case 89/81 Staatssecretaris van Financiën v Hong Kong Trade Development Council [1982] ECR 1277, at paragraph 9.

(18) OJC 226,28.8.1984, p. 2

(19) Item 12 of the annex.