© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
J1. General points on zero-rating
GENERAL
- Derogation permitted within strict boundaries which are mainly purposive
"[21] Zero-rating is not part of the mainstream of VAT. Rather it is a derogation from it, permitted to member states within strict boundaries, which are mainly purposive in nature. Article 110 of the Principal VAT Directive (Council Directive 2006/112/EC) permits zero-rating, subject to other conditions, only if exemption with deductibility of VAT:
“have been adopted for clearly defined social reasons and for the benefit of the final consumer.”
In that formulation the phrase “the final consumer” means the person who acquires goods or services for his personal use, as opposed to an economic activity: see European Communities Commission v United Kingdom (Case C-416/85) [1990] 2 QB 130 at 139-140 per Advocate General Darmon at para 14." (Balhousie Holdings Ltd v. HMRC [2021] UKSC 11)
Basis for zero-rating
- Benefit to final consumer may be indirect
"[21]...There is no dispute that zero-rating for the classes of supplies in connection with the construction of (inter alia) care homes in items 1 to 4 of Group 5 satisfies those conditions. This is because the provision of care homes for members of the public in need of them is a relevant social purpose, and because the residential occupants of care homes are for this purpose final consumers. The way in which the zero-rating of supplies to builders and owners of care homes actually benefits their occupants is less straightforward, but it may be assumed for present purposes that the reduction in the burden of taxation on those supplies causes a reduction in the cost of the construction and acquisition of care homes which developers and owner-operators pass on to the residential occupants, to some indefinite extent, in reduced prices for occupancy and the caring services provided therein.
[22] A particular benefit which zero-rating provides to suppliers of goods or services is that the supply is, by contrast with an exempt supply, still a taxable supply, so that VAT paid on the supplier’s inputs may still be recovered. In the present context the immediate beneficiary of the zero-rating of the supply constituted by the Grant was or included Faskally rather than merely BCL, as Mr Kieron Beal QC for HMRC was at pains to emphasise. But it must still be assumed that this benefit percolated down to residential occupants of the Home, by enabling Faskally to provide the Home to BCL at a lower cost, and BCL to provide services to residential occupants with the benefit of a lower cost base. It is not suggested that any aspect of this zero-rating scheme failed to satisfy the social purpose condition in article 110." (Balhousie Holdings Ltd v. HMRC [2021] UKSC 11)
- Zero-rate is exemption with refund
"[8] It is not disputed that that zero-rate may be treated as an exemption with refund of the tax paid within the meaning of Article 28(2) of the Sixth Directive, which provides:..." (Talacre Beach Caravans C-251/05)
Nature of zero-rating
Interpretation of zero-rating
- EU law principles of interpretation possibly only relevant to ensure domestic provision is intra vires
"[24] The CJEU cases are not particularly instructive for a further reason. As explained above, the zero-rating scheme is a permitted national exemption from VAT under the Principal VAT Directive. If the outcome of this issue could have a bearing on the question whether this part of the zero-rating scheme was compliant with article 110, then it might well be that recourse to the jurisprudence of the CJEU, and even to its rules of construction, might be necessary or appropriate, even though a reference to the Court of Justice is of course no longer available for the resolution of issues of that kind which are not acte clair. But neither party made any suggestion that, for example, to allow a care home operator to finance its acquisition of the care home by sale and lease-back rather than secured bank lending without incurring a self-supply charge came anywhere near that possibly elusive boundary. Part 2 of Schedule 10 to the VATA, which includes paragraph 36(2), is just a small part of a detailed scheme enacted by UK primary legislation, which is compliant with article 110, and which is therefore subject to the usual principles applicable in the UK for the interpretation of statutory material. In short, and cases about taxation merely exemplify a general rule:
“The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”
Per Ribeiro PJ in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, 6 ITLR 454, para 35, approved for general use in Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 684, para 36 and UBS AG v Revenue and Customs Comrs [2016] 1 WLR 1005, para 66 per Lord Reed. It is nothing to the point that the present case is not about tax avoidance, or that it is about VAT rather than taxes on income or gains. This principle of statutory construction is of general effect, as Lord Drummond Young rightly observed in the Inner House, at para 13." (Balhousie Holdings Ltd v. HMRC [2021] UKSC 11 - compare with Lady Arden's judgment)
EXTENT OF ZERO-RATING
- Potential for multiple rates for same supply where Member State derogation excluded part of supply from zero-rating
"[32] As regards, third, the judgment of 6 July 2006, Talacre Beach CaravanSales (C‑251/05, EU:C:2006:451), that judgment, as is clear from paragraph 14 thereof, concerns the question of whether the fact that certain goods are the subject of a single supply, including both a principal item which is by virtue of a Member State’s legislation subject to an exemption with refund of the tax paid, within the meaning of Article 28(2)(a) of the Sixth Directive, and goods which that legislation excludes from the scope of that exemption, prevents the Member State concerned from levying VAT at the standard rate on the supply of those excluded items.
[33] The Court, which answered that question in the negative, underlined that, in the situation at issue in the case having given rise to that judgment, to exempt the delivery of goods supplied together with the principal item, those goods being specifically excluded from an exemption by the national legislation, would run counter to the wording and purpose of Article 28(2)(a) of the Sixth Directive, according to which the scope of the derogation laid down by that provision is restricted to what was expressly covered by the national legislation on 1 January 1991 (see, to that effect, judgment of 6 July 2006, Talacre Beach Caravan Sales, C‑251/05, EU:C:2006:451, paragraphs 20 to 22). In that judgment, the Court expressly held that the case-law on the taxation of single supplies did not apply to the exemptions with refund of the tax paid with which Article 28 of the Sixth Directive is concerned (see, to that effect, judgment of 6 July 2006, Talacre Beach Caravan Sales, C‑251/05, EU:C:2006:451, paragraph 24)." (Stadion Amsterdam C-463/16)