Supreme Court refers VAT abuse of rights question to EU Court on direct effect and legal certainty.

THE SUPREME COURT [Appeal No 229/2008] O’Donnell J. Clarke J. MacMenamin J. Laffoy J. Dunne J.

BETWEEN EDWARD CUSSENS, JOHN JENNINGS AND VINCENT KINGSTON APPELLANTS AND

T. G. BROSNAN (INSPECTOR OF TAXES)

RESPONDENT

Decision of the Court

Decision of the Supreme Court referring a question to the Court of Justice of the European Union (the Court) for a Preliminary Ruling

1. This is an order for reference for a preliminary ruling by the Supreme Court pursuant to Article 267 of the Treaty on the Functioning of the European Union. The question relates to the interpretation of EC Council Directive 77/388 of 17 May, 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – common system of Value Added Tax: uniform basis of assessment, as amended by Council Directive 95/7 of 10 April, 1995 (OJ05. 05.1995 L102p18) (the Sixth Directive).

2. The reference is made in this appeal to the Supreme Court brought by Edward Cussens, John Jennings and Vincent Kingston (the appellants) nominally against T. G. Brosnan (Inspector of Taxes), the real respondent on the appeal being the Revenue Commissioners (the Commissioners). The proceedings arise from assessments raised by the Commissioners on the appellants in August 2004 in respect of Value Added Tax (VAT)

for periods between January 2002 and June 2004 (the disputed assessments) on the sales of fifteen holiday homes (the properties), which had been developed by the appellants, to purchasers. At the relevant time, national law in relation to VAT was governed by the VAT Act 1972, as amended (the VAT Act). The disputed assessments, which pre-dated the decision of the Court in Halifax and Ors., C-255/02, EU: C:2006:121 (Halifax), were premised on the Commissioners’ contention that certain transactions (the pre-sale transactions) in relation to the properties entered into by the appellants prior to the sales of the properties to the purchasers thereof (the purchaser sales transactions)

constituted an abusive practice under European Union law and should be disregarded for the purposes of assessing VAT. In raising the disputed assessments the Commissioners did not invoke any legislative provision or any common law principle in force under national law.

The impugned transactions

3. The pre-sale transactions which the Commissioners contended constituted an abusive practice and the context in which they were entered into were as follows:

(a) The appellants jointly owned a development site at Baltimore, County Cork which they had acquired with the intention of developing it by constructing fifteen holiday homes on it and, when constructed, selling on the properties with freehold title and for profit. The properties were substantially completed by December 2001.

(b) In order, as they acknowledge, to reduce their liability for VAT on the sale of the properties to the ultimate purchasers, the appellants, on the advice of their tax advisers, entered into the following transactions:

(i) By a lease dated 8th March, 2002 (the Long Lease), the appellants leased the properties to a company associated with them, Shamrock Estates Limited (SEL), for a term of twenty years and one month from 8th March, 2002 at an annual rent of €66,100 per annum, subject to annual review, and payable in arrears.

(ii) By an agreement dated 8th March, 2002 (the Short Lease), SEL leased back the properties to the appellants for a term of two years from 8th March, 2002 subject to a rent of €67,000 per annum which was not payable until the termination of the tenancy. It was a term of the lease-back arrangement that the tenancy would terminate immediately prior to the disposal by the appellants of the freehold or a long leasehold interest in the properties.

(iii) On 3rd April, 2002, the Long Lease in favour of SEL and the Short Lease were both extinguished by mutual surrender, so that the appellants once again became the owners of the entire freehold interest in the properties, that is to say, the land and the houses built on the land.

(c) After mid-May 2002 all of the properties were sold to purchasers at the best price the appellants could obtain, the purchasers acquiring the freehold interest from the appellants. On those purchaser sales transactions the purchasers paid to the appellants sums which aggregated approximately €3m.

Provisions of the Sixth Directive relevant to assessment of VAT on the transactions

4. At the kernel of the appellants’ case as to the application of the principle of abuse of rights is Article 4(3)(a) of the Sixth Directive, the core issue raised by the appellants being whether the provisions of the VAT Act on which the appellants relied, in particular, s. 4(9) and s. 4(6), were inconsistent with Article 4(3), as the appellants contended.

Article 4(3) provided, inter alia, as follows:

“Member States may also treat as a taxable person anyone who carries out, on an occasional basis, a transaction relating to activities referred to in paragraph 2 and in particular one of the following:

(a) the supply before first occupation of buildings or parts of buildings and the land on which they stand; . . .. Member States may determine the conditions of application of this criterion to transformations of buildings and land on which they stand. Member States may apply criteria other than that of first occupation, such as the period elapsing between the date of completion of the building and the date of first supply or the period elapsing between the date of first occupation and the date of subsequent supply, provided that these periods do not exceed five years and two years respectively.

A building shall be taken to mean any structure fixed to or on the ground;

(b) the supply of building land.”

5. The Commissioners relied on Article 5(3), which provides that Member States may consider, inter alia, “certain interest in immovable property” (para. (a)) to be tangible property, and therefore a supply of goods, in support of their contention that certain of the relevant provisions of the VAT Act were consistent with the Sixth Directive.

6. On the other hand, the appellants contended that a provision of the VAT Act upon which they relied, subs. (9) of s. 4 which is quoted later, was inconsistent with Article 13B, as that article mandated that Member States “shall exempt” from VAT to the matters listed thereafter “under conditions which they shall lay down” for the purpose of “preventing any possible evasion, avoidance or abuse”. In particular the appellants contended that the provision of the VAT Act relied on was not in compliance with paragraph (g) of Article 13B, the matter referred to in paragraph (g) being –

“the supply of buildings or parts thereof, and of the land on which they stand, other than as described in Article 4(3)(a)”.

The provisions of the VAT Act relevant to the assessment of VAT on the transactions

7. Section 4 of the VAT Act as in force in 2002 contained special provisions in relation to the supply of immovable goods. The subs-sections outlined hereafter contained provisions which are relevant to the assessment of VAT on the pre-sale transactions and on the purchaser sales transactions.

8. Sub-section (1) of s. 4 specified the property to which s. 4 applied and contained the following provisions:

(a) Sub-section (1)(a), which identified the immovable goods to which the section applied and provided, inter alia:

“This section applies to immovable goods –

(i) which have been developed by or on behalf of the person supplying them, . . .”

(b) Sub-section (1)(b), which defined “interest” for the purposes of s. 4 and provided, inter alia, as follows:

“In this section ‘interest’, in relation to immovable goods, means an estate or interest therein which, when it was created was for a period of at least ten years, or . . ., and a reference to the disposal of an interest includes a reference to the creation of an interest, . . .”

9. Sub-section (2) of s. 4 outlined the scope of the supply deemed to take place and provided, subject to certain provisions of the VAT Act specified, that –

“. . . a supply of immovable goods shall be deemed, for the purposes of this Act, to take place if, but only if, a person having an interest in immovable goods to which this section applies disposes (including by way of surrender or by way of assignment), as regards the whole or any part of those goods, of that interest or of an interest which derives therefrom.”

The combined effect of subs. (1) and subs. (2) of s. 4 was that the creation of an interest in immovable goods for a period of at least ten years by the person who had developed them was deemed to be a supply of immovable goods for the purposes of the VAT Act.

10. Sub-section (4) of s. 4, which dealt with circumstances in which the creation of an interest for at least ten years gave rise to a reversion, provided as follows:

“Where a person having an interest in immovable goods to which this section applies disposes, as regards the whole or any part of those goods, of an interest which derives from that interest in such circumstances that he retains the reversion on the interest disposed of, he shall, in relation to the reversion so retained, be deemed, for the purposes of section 3(1)(f), to have made an appropriation of the goods or of the part thereof, as the case may be, for a purpose other than the purpose of his business.”

The effect of subs. (4) of s. 4 was that a reversion retained by the person who had developed the immovable goods on the creation of a lease for at least ten years was regarded as a “self supply”.

11. Sub-section (6) of s. 4 provided that, notwithstanding anything contained in s. 4, or in s.

2, which imposed the charge for VAT, “tax shall not be chargeable on the delivery of immovable goods” in the circumstances outlined, including the supply of –

“(a) [Immovable goods] in relation to which a right in favour of the person making the delivery to a deduction under section 12 in respect of any tax borne or paid on the delivery or development of the goods did not arise and would not . . ., have arisen.”

The effect of subs. (6) was that a charge for VAT did not arise in relation to the supply of immovables if an input credit as provided for in s. 12 in favour of the person making the supply did not arise.

12. Sub-section of (9) of s. 4, which was introduced with effect from 27th March, 1998, and the provenance of which is explained later, provided:

“Where a disposal of an interest in immovable goods is chargeable to tax and where those goods have not been developed since the date of the disposal of that interest (hereinafter referred to in this sub-section as the ‘taxable interest’) any disposal of an interest in those goods after that date by a person other than the person who acquired the taxable interest shall, for the purposes of this Act, be deemed to be a supply of immovable goods to which sub-section (6) applies.”

Sub-section (6) of s. 4, which is in part quoted earlier, outlined certain circumstances by virtue of which property was non-vatable or exempt from VAT. In effect, where it applied, sub-section (9) created a sub-section (6) exemption from a charge for VAT. In the words of subs. (6), that meant that “tax shall not be charged on the supply of immovable goods” in the circumstances where subs. (9) was applicable. It is this provision which is relied on by the appellants and which they contend is inconsistent with Article 13B(g), which excludes from the exemptions thereby mandated a supply of buildings and the lands on which they stand which come within Article 4(3)(a), that is to say, a supply before first occupation of the buildings and the land.

13 Section 10 dealt with the amount on which tax was chargeable. Sub-section (9) of s. 10 specifically dealt with the supply of immovable goods and the supply of services consisting of the development of immovable goods. Paragraph (a) of that sub-section provided that on each such supply “the value of any interest in the goods disposed of in connection with the supply shall be included in the consideration”. Further, and of more relevance for present purposes, paragraph (b) provided that the “value of any interest in immovable goods shall be the open market price of such interest”. As at 2002, a Statutory Instrument, namely, Value Added Tax Regulations 1979 (S.I. No. 63 of 1979)

(the Regulations) was in force and it governed the application of s. 10(9) in the circumstances which arose on the appeal to the Supreme Court. The Regulations came into operation on 1st March, 1979. Regulation 19 dealt with the valuation of interests in immovable goods. No issue arose on the appeal in relation to the application of Regulation 19(1), which set out the manner of valuation on the creation of a lease of an interest in immovable goods for the purposes of s. 10(9) of the VAT Act. Regulation 19(2), which was substituted in 1998, contained special provisions in relation to the valuing of a reversionary interest retained by a disponer on the disposal of an interest derived from an interest in immovable goods and para. (b) provided, inter alia, that –

“if, under the terms of the disposition, the interest disposed of is for a period of 20 years or more, or is deemed to be for a period of 20 years or more, the value of the reversionary interest shall be disregarded.”

The effect of Regulation 19(2) was that a reversion retained by the disponer on the creation of a lease for a period of twenty years or more was not chargeable to VAT, as its value was disregarded.

Application of provisions of VAT Act to the transactions in 2002

14. It is not in dispute between the appellants and the Commissioners that the proper application of the provisions of the VAT Act in force as at 2002 outlined earlier, when considered as “standalone” provisions, and without reference to the Sixth Directive or the principle of abuse of rights, to the facts and to the pre-sale transactions and to the purchaser sales transactions was as set out in the following paragraphs.

15. First, the Long Lease in favour of SEL, being a lease for longer than ten years, by the combined effect of subss. (1) and (2) of s. 4, was deemed to be a supply of goods. The amount of VAT chargeable in respect of that disposition was assessable in accordance with s. 10(9) and Regulation 19(1) of the Regulations and it was, in fact, calculated on foot of a professional valuation of the capitalised value of that leasehold interest (€320,000). VAT in the amount of €40,000 was paid by SEL to the appellants, who accounted for and paid it to the Commissioners. It is accepted by the Commissioners that the VAT liability on the grant of the Long Lease has been properly calculated in accordance with the VAT Act as then in force and that the VAT due has been paid by the appellants to the Commissioners.

16. Secondly, by virtue of s. 4(4), a self supply of the reversionary interest to the appellants was deemed to take effect which, but for the provisions next mentioned, would have given rise to a separate liability for VAT. However, by virtue of the application of s. 10(9)

and Regulation 19(2)(b) of the Regulations, the Long Lease to SEL being for a term in excess of twenty years, no VAT was exigible on the deemed self supply of the reversionary interest.

17. Thirdly, the combined effect of the supplies of goods which were deemed to have occurred on the grant of the Long Lease to SEL and the self supply of the reversionary interest to the appellants was that, for VAT purposes, the entire interest in the property was deemed to be disposed of.

18. Separately, as regards the subsequent transactions between SEL and the appellants, the position was as follows:

(a) The Short Lease by way of lease-back to the appellants, being for a term of less than ten years and thus not being a supply of goods, was a supply of services pursuant to the VAT Act (s. 5(1)) and, as a letting of immovable goods, was exempt from VAT in accordance with the provisions of the VAT Act (s. 6 and paragraph (iv) of the First Schedule). However, as SEL was making an exempt, rather than a taxable, use of the property, in accordance with the VAT Act (s. 12), it was not entitled to input credit for the VAT in the amount of €40,000, which it had paid to the appellants in respect of the creation of the Long Lease in its favour.

(b) As no premium was paid in respect of the subsequent surrender of the Short Lease by the appellants to SEL, that supply was outside the scope of the VAT Act in accordance with s. 2(1) thereof.

(c) While the surrender of the Long Lease by SEL to the appellants constituted a supply of goods by virtue of s. 4(2) of the VAT Act, which could have been liable to VAT on the capitalised value of the residue of the term of the Long Lease, the surrender was exempt from VAT in accordance with s. 4(6)(a), which, as quoted above, provided that VAT was not chargeable on a supply of immovable goods “in relation to which a right in favour of the person making the supply to a deduction under s.

12 in respect of any tax borne or paid on the supply . . . of the goods did not arise”.

By reason of the fact that SEL was not entitled to recover the VAT it had incurred in respect of the acquisition of the Long Lease, the surrender was exempt.

19. As a consequence of the application of the provisions of the VAT Act to the pre-sale transactions, VAT in the sum of €40,000 on the Long Lease and was duly discharged.

VAT was not chargeable on any of the other pre-sale transactions. The Commissioners do not dispute that the provisions of the VAT Act were properly applied to the pre-sale transactions in the manner outlined.

20. Finally, each of the subsequent sales of the properties by the appellants to the purchasers, that is to say, each of the purchaser sales transactions, was exempt from VAT under the provisions of the VAT Act, because each came within s. 4(9). As noted earlier, the creation of the Long Lease of the properties to SEL was deemed to be a supply of goods. The Long Lease took effect at a time when the properties had been developed.

By virtue of s. 4(9) the disposal of an interest in those goods, that is to say, in the properties, by a person other than SEL, for the purposes of the VAT Act, was deemed to be a supply of immovable goods to which s. 4(6) applied, that is to say, it was deemed to be a supply which was not chargeable with VAT. The appellants, by virtue of the combined effect of the pre-sale transactions, having had the entire freehold interest in the properties re-vested in them, VAT was not chargeable on the sales of the freehold in the properties by them to the purchasers in accordance with the provisions of the VAT Act, in particular, s. 4(9) and s. 4(6).

21. Accordingly, the net effect of all of the transactions outlined above was that, in accordance with the provisions of the VAT Act then in force, the appellants accounted for and paid to the Revenue Commissioners VAT in the sum of €40,000 charged on and paid by SEL to them on the grant of the Long Lease to it. No VAT was accounted for on any of the subsequent transactions because either the transactions were exempt from, or the properties had ceased to be liable for, VAT in accordance with the provisions of the VAT Act.

Disputed assessments raised by the Commissioners in 2002

22. The Commissioners subsequently raised the disputed assessments pursuant to the VAT Act on the appellants in respect of VAT for periods from January 2002 to June 2004 on 27th August, 2004, claiming that there was a balance of tax due and payable in respect of VAT on the disposal of the properties, that is to say, the purchaser sales transactions, having given credit for the sum of €40,000 accounted for by the appellants, the balance due being in the amount of €85,746.00.

23. While there has been divergence in the position adopted by the Commissioners throughout the administrative and judicial processes which have led to the appeal to the Supreme Court, the Commissioners’ argument on the appeal in support of the correctness of the disputed assessments is that the lease and leaseback arrangements of the pre-sale transactions constituted an artificially created first supply before occupation, which was designed to ensure that the subsequent real supplies, that is to say, the purchaser sales transactions, being the sales of the freehold interest in the properties to the purchasers, were not subject to VAT and that, accordingly, in accordance with the Sixth Directive, those arrangements constituted an abusive practice and must be disregarded for the purposes of assessing the appellants’ liability to VAT, in accordance with the judgment of the Court in Halifax.

24. In the national administrative and judicial processes which are outlined below, the Commissioners did not invoke any statutory provision of national law (for example, s. 811 of the Taxes Consolidation Act 1997 referred to in footnote 69 of the opinion of the Advocate General in Halifax) or any common law principle or rule or any judicial rule in support of their contention that the transactions prior to the sale of the freehold interest in the purchaser sales transactions constituted an abusive practice and should be disregarded in accordance with national law.

National administrative and judicial processes

25. In accordance with national law, the appellants appealed the disputed assessments to an Appeal Commissioner of the Commissioners. On 21st July, 2005, the Appeal Commissioner dismissed the appeal. The appellants then appealed the determination of the Appeal Commissioner and that appeal came by way of re-hearing before the Circuit Court on 10th October, 2006. The Circuit Court Judge decided that the appeal of the appellants be dismissed. However, at the request of the appellants, the Circuit Court Judge stated a case for the opinion of the High Court on certain questions of law, on the basis of the facts found by him. The Circuit Court Judge found that neither the Long Lease nor the Short Lease had any commercial reality, finding that there was no evidence of intention to sell the property by way of lease to any third party and that, in effect, the pre-sale transactions were entered into for the purpose of reducing VAT.

26. The questions posed in the Case Stated for the opinion of the High Court which are of relevance on this reference were whether the Circuit Court Judge was correct in holding that:

(a) the lease and leaseback arrangements had no commercial reality and constituted an abusive practice within the doctrine set out in the judgment delivered by the Court on 21st February, 2006 in Halifax and should be disregarded for the purposes of VAT; and

(b) the decision of the Court in Halifax and the doctrine of abusive practice should have direct effect in the absence of implementing national legislation.

27. Following the hearing of the Case Stated, by order of the High Court made on 13th June, 2008, the questions posed in the Case Stated which are relevant to this reference were answered as follows:

(a) The lease and leaseback arrangements had no commercial reality and constituted an abusive practice within the doctrines identified by the Court. As such they should be re-defined for the purpose of VAT in order to reflect the true reality of the actions of the appellants.

(b) The decisions of the Court as to abusive process are of general application and they require national courts to re-define abusive measures in accordance with reality.

National legislation is not required in a Member State in respect of this principle of European law.

The outcome of the Case Stated was that the disputed assessments were upheld.

28. The appellants appealed the decision of the High Court to the Supreme Court. Having heard the submissions of the parties, the Supreme Court, of its own initiative, decided to refer the questions set out later to the Court. For the purposes of the reference the Supreme Court considers that it is bound by the finding made by the Circuit Court Judge that neither the Long Lease nor the Short Lease had any commercial reality and that, in effect, the appellants entered into those transactions for the purpose of reducing their liability to VAT.

Derogation

29. On the appeal to the Supreme Court issues arose in relation to a derogation which Ireland notified to the Commission in February 1979 under Article 27(5) of the Sixth Directive.

The notification stated that, pursuant to Article 27(5) of the Sixth Directive, Ireland intended to continue certain measures which were outlined and which were in force on 1st January, 1977 “in order to simplify the procedure for charging VAT . . . and in order to prevent evasion or avoidance”. Under the heading of “Anti-avoidance Measures”, the following measure was set out:

“The treatment, as a supply of property, of a granting of a lease for a term of ten years or more, the taxation at the same time of all interests disposed of in connection with the supply and of the value of the reversion except where the letting is for twenty years or more”.

The relevant provisions of the VAT Act in force as of 1st January, 1977 referred to were the follow provisions:

(a) Section 4(1)(a) and (b) and section 4(2) (the granting of a lease for a term of ten years or more),

(b) section 4(4) (the taxation at the same time of all interests disposed of), and

(c) section 10(9), as implemented by a regulation in terms of Regulation 19(2)(b) of the Regulations (value of reversion where the letting is for a period of twenty years or more).

30. Neither on the wording of the derogation, nor on the circumstances in which s. 4(9) was enacted, does s. 4(9) come within the derogation. Section 4(9) was one of two amendments to s. 4 introduced in 1998, that is to say, twenty one years after the derogation was notified. The amendments were introduced to address the findings in a

decision of the Supreme Court in 1997 in relation to certain aspects of the application of s. 4(4), which decision is not relevant to the issues arising from the disputed assessments, as it involved the issue of entitlement to input credits for post-letting expenses.

31. Accordingly, the Supreme Court considers that the derogation is not of relevance to the questions referred to the Court.

Submissions of appellants

32. The appellants submitted that implementing national legislation is necessary to give effect to the principle of abuse of rights in Irish law, on the basis that the principle is a principle of interpretation, not a substantive principle, and that its application in a Member State is effected by means of the principle of conforming interpretation. Absent either national law implementing the principle, or some rule of national law enshrining the principle, it was submitted that the principle of abuse of rights could not provide a basis for raising assessments to VAT on individuals. There was no such legislation or rule in force in Ireland in 2002. Accordingly, it was submitted that the principle cannot be deployed against the appellants, because to do so would undermine the appellants’ right to rely exclusively on national legal provisions and the preservation of legal certainty.

33. While the appellants accepted that the national court, when hearing a case which falls within the scope of the Sixth Directive, must apply the provisions of national law specifically intended to implement the Sixth Directive by interpreting those provisions so far as possible in such a way that they are applied in conformity with the objective of the Sixth Directive, it was submitted that the national court is not obliged to interpret its national law in a manner which is incompatible with the relevant national legislation.

That, it was submitted, is what the Commissioners sought to oblige the national court to do in relation to the disputed assessments, having sought to rationalise its entitlement to do so on the basis of the doctrine of abusive practice. It was submitted that, if the national court were to do so, it would be effectively disapplying the provisions of the VAT Act, in particular, s 4(9) and s. 4(6), on which the appellants relied and which expressly exempted the appellants from liability to VAT on the supply of buildings before occupation, where there had been a previous disposal which was chargeable to tax, notwithstanding the provisions of Article 4(3) of the Sixth Directive. In effect, it was submitted, the Commissioners are asking the national court to apply an interpretation of the VAT Act which is contra legem and are inviting the Court to breach the appellants’ right to have legislation applicable to them which was certain and the application of which was foreseeable.

34. In relation to the foreseeability requirement, the appellants emphasised that the transactions upon which the disputed assessments were based had occurred four years before the Court gave its judgment in Halifax, in which judgment the circumstances in which the doctrine of abusive practice could be applied in the sphere of VAT were first determined. The retroactive application of the abuse of rights doctrine through conforming interpretation would, it was submitted, not only be contra legem, but it would also be a clear breach of the appellants’ right to have legislation which was certain, the application of which was foreseeable, and to have their legitimate expectations protected.

35. The appellants also submitted that the criteria identified by the Court in Halifax for an abusive practice to exist are not met in this case. The position of the appellants was that the onus of establishing compliance with the criteria was on the Commissioners and that they had not discharged that onus. In particular, it was submitted that the Commissioners had failed to discharge the onus of establishing that, in relation to the transactions on which the disputed assessments were raised, on the basis that they constituted abusive practice:

(a) there was formal compliance with, or reliance on, the provisions of the Sixth Directive; or

(b) there was formal compliance with, or reliance on, the provisions of national legislation which were implementations of the provisions of the Sixth Directive.

The appellants’ position was that, in relation to the pre-sale transactions and the purchaser sales transactions, they were not relying on the provisions of the Sixth Directive, nor on any implementing measure of the Sixth Directive, nor any permitted derogation therefrom. Rather they were relying on the provisions of the VAT Act, which they contended were incompatible with the Sixth Directive. Accordingly, the position of the appellants was that the provisions of the VAT Act on which they relied, and on the basis of which it is acknowledged that their liability to VAT was assessable and was properly discharged under national law, were incompatible with the Sixth Directive, so that the principle of abuse of rights cannot extend to those provisions of national law.

36. The appellants also submitted that, even if the assessment of the appellants to VAT is the consequence of formal application of the conditions laid down by the relevant provisions of the Sixth Directive, which it was contended was not the case, the tax advantage which accrued to the appellants was not contrary to the purpose of those provisions, in that it had not been established objectively that the essential aim of the transactions concerned was to obtain a tax advantage. The objective was to dispose of the properties to the purchasers in a tax efficient way, not solely to conduct artificial transactions giving rise per se to a tax advantage.

Submissions of Commissioners

37. The Commissioners’ position is that the principle of abuse of rights may be applied to interpreting national measures implementing European Union law directly, without the requirement for specific national implementing measures. The following key principles underline their position:

(a) the prohibition of abuse of rights has been recognised as a general principle of European Union law;

(b) Member States are obliged to interpret national measures implementing the Sixth Directive in a manner consistent with general principles of European Union law and, in particular, the prohibition on abusive practice;

(c) Member States are obliged to interpret national measures implementing the Sixth Directive in a manner consistent with the wording, spirit and purpose of the Sixth Directive and ensures its useful effect; and

(d) abusive practices contravene the spirit, purpose and useful effect of the Sixth Directive.

It follows, it was submitted, that Member States (including administrative authorities and national courts) are required to interpret the provisions of the VAT Act implementing the Sixth Directive in a manner that precludes a taxable person from undermining the correct application of the Sixth Directive and the national legislation implementing it by reducing his VAT liability, or claiming a deduction, on the basis of a transaction that may be characterised as an abuse of rights.

38. The Commissioners emphasised that national courts are required to do whatever lies within their jurisdiction, taking the whole body of national law into consideration and applying interpretative methods recognised by national law, with a view to ensuring the full effectiveness of the Sixth Directive. The Commissioners submitted that due to the supremacy of EU law, the abuse of rights doctrine must be applied by the national court.

It was submitted that there exist interpretative rules in national law that may be applied to prevent abusive practices and that it is, therefore, possible for the national courts to interpret the VAT Act in a manner consistent with the Sixth Directive and the general principles of European Union law. However, the Commissioners did not point to any statutory provision or recognised rule of interpretation of national legislation in support of that submission. Interpreting the VAT Act in accordance with the spirit and purpose of the Sixth Directive is not, it was submitted, an interpretation contra legem nor an interpretation which breaches the principle of legal certainty, rather it is an interpretation that is required by the abuse of rights doctrine in general and the Halifax case in particular.

39. The Commissioners submitted that the Sixth Directive was effective against an individual on the basis that it is well established under European Union law that the application of the principle of harmonious interpretation has horizontal effect and thus produces legal effects on the rights of private individuals.

40. The Commissioners’ position is that the provisions of the Sixth Directive have been transposed into Irish law. They emphasise that both the Sixth Directive and the VAT Act require that the sale of newly constructed houses are liable to VAT on first supply before occupation.

41. As regards the structure which the appellants put in place, the pre-sale transactions, and the manner in which they sought to rely on the provisions of the VAT Act to avoid a charge of VAT on the purchaser sales transactions, the Commissioners’ position was that this amounted to abusive practice. The pre-sale transactions, comprising artificially created supply by way of lease, lease-back and surrender, it was submitted, had no commercial reality other than the mitigation of VAT liability, as was found by the Circuit Court. Therefore, those pre-sale transactions constituted an abuse because they were utilised in order to rely on provisions of the VAT Act in a way and for a purpose which was contrary to the VAT Act and to the Sixth Directive, in particular, to avoid the charge of VAT on the supply of a newly constructed building for occupation.

42. As regards the existence of s. 4(9) of the VAT Act, it was submitted by the Commissioners that it was not dependent on a derogation. They submitted that it was introduced in 1998 to clarify the law already in place under s. 4(4) and is compatible with Article 4(3) of the Sixth Directive. The reliance by the appellants on s. 4(9), in conjunction with other provisions, is also an abuse of Article 4(3)(a), it was submitted, in that, by deploying the artificial pre-sale transactions, the appellants contrived to engineer a situation where the charge to VAT on first supply before occupation attached to the Long Lease, whereas the real first supply before occupation was the sale of each of the properties to the purchaser thereof, that is to say, the purchaser sales transactions. That constituted an abusive practice which must be redressed by redefining the transactions, it was submitted. In such redefining of the transactions, it was submitted, the pre-sales transactions would be treated as not having taken place, so that the purchaser sales transactions would be chargeable with VAT, but, in line with the decision in Halifax, credit would be given for the VAT paid on the pre-sale transactions. This would not constitute a disapplication of national law, it was submitted; rather it is ignoring artificial transactions so that the national law is applied to the real transactions.

43. The Supreme Court observes that the redefining of the transactions as reflected in the disputed assessments ignores the pre-sale transactions save to the extent that credit is given for VAT in the sum of €40,000 paid in respect of the Long Lease. Further, the disputed assessments ignore the application of s. 4(9) and (6) of the VAT Act to the circumstances and, in effect, in being asked to uphold the disputed assessments, the Supreme Court is being asked to disapply a provision of national law, s. 4(9).

44. The Commissioners rejected the submission of the appellants that the essential aim of the transactions prior to the sale of the properties to the purchasers was not to obtain a tax advantage, but rather to achieve some commercial advantage by achieving a greater profit by saving VAT, as being untenable.

45. The Commissioners did not make any allegation of fraud against the appellants in the national administrative and judicial processes.

Questions for the Court

46. In the light of the foregoing, the Supreme Court refers the following questions to the Court for preliminary ruling:

(1) Is the principle of abuse of rights, as recognised in the judgment of the Court in Halifax as being applicable in the sphere of VAT, directly effective against an individual in the absence of a national measure, whether legislative or judicial, giving effect to that principle, in circumstances where, as here, the redefining of the pre-sale transactions and the purchaser sales transactions (collectively referred to as the appellants’ transactions), as advocated by the Commissioners, would give rise to a liability on the part of the appellants to VAT, where such liability, on the proper application of the provisions of national legislation in force at the relevant time to the appellants’ transactions, did not arise?

(2) If the answer to question (1) is that the principle of abuse of rights is directly effective against an individual, even in the absence of a national measure, whether legislative or judicial, giving effect to that principle, was the principle sufficiently clear and precise to be applied to the appellants’ transactions, which were completed before the judgment of the Court in Halifax was delivered, and, in particular, having regard to the principles of legal certainty and the protection of the appellants’ legitimate expectations?

(3) If the principle of abuse of rights applies to the appellants’ transactions so that they are to be redefined –

(a) what is the legal mechanism by means of which the VAT due on the appellants’ transactions is assessed and is collected, since no VAT is due, assessable or collectable in accordance with national law, and

(b) how are the national courts to impose such liability?

(4) In determining whether the essential aim of the appellants’ transactions was to obtain a tax advantage, should the national court consider the pre-sale transactions (which it has been found were effected solely for tax reasons) in isolation, or must the aim of the appellants’ transactions as a whole be considered?

(5) Is s. 4(9) of the VAT Act to be treated as national legislation implementing the Sixth Directive, notwithstanding that it is incompatible with the legislative provision envisaged in Article 4(3) of the Sixth Directive, on the proper application of which the appellants, in relation to the supply before first occupation of the properties, would be treated as taxable persons, notwithstanding that there had been a previous disposal which was chargeable to tax?

(6) If s. 4(9) is incompatible with the Sixth Directive, are the appellants, by relying on that sub-section, engaged in an abuse of rights contrary to the principles recognised in the judgment of the Court in Halifax?

(7) In the alternative, if s. 4(9) is not incompatible with the Sixth Directive, have the appellants achieved a tax advantage which is contrary to the purpose of the Directive and/or s. 4?

(8) Even if s. 4(9) is not to be treated as implementing the Sixth Directive, does the principle of abuse of rights as established by the judgment of the Court in Halifax nevertheless apply to the transactions in issue by reference to the criteria laid down by the Court in Halifax?