Supreme Court Clarifies Distinction Between Fiscal Measures and Customs Duties in VAT Relief for Third Territories

Introduction

The case of Jersey Choice Ltd v HM Treasury ([2024] UKSC 5) marks a significant development in the interpretation of Value Added Tax (VAT) regulations concerning low-value consignment ("LVC") relief. The Supreme Court of the United Kingdom was tasked with determining whether the removal of LVC Relief for mail-order goods dispatched from the Channel Islands to the UK constituted a breach of European Union (EU) law, specifically concerning the free movement of goods within the EU customs union. This commentary explores the background, key issues, court's findings, and the broader legal implications of the judgment.

Summary of the Judgment

Jersey Choice Ltd ("JCL"), a Jersey-registered horticultural exporter, challenged the UK government's decision to withdraw LVC Relief on low-value goods imported from the Channel Islands. JCL alleged that this removal breached articles 28, 30, and 34 of the Treaty on the Functioning of the European Union (TFEU), which govern the free movement of goods. Additionally, JCL sought Francovich damages, claiming substantial financial losses due to the alleged breach of EU law.

The High Court struck out JCL's claim for lack of reasonable grounds, a decision upheld by the Court of Appeal. Upon escalation, the Supreme Court examined whether the charge imposed by removing LVC Relief qualified as a customs duty or a fiscal measure under EU law. The Court concluded that the charge was a fiscal measure governed by article 110 TFEU, not a customs duty under articles 28 and 30 TFEU. Consequently, there was no breach of EU law, and JCL's appeal was dismissed.

Analysis

Precedents Cited

The judgment extensively referenced key EU case law, including Francovich v Italian Republic [1991] and Gaston Schul Douane Expediteur BV v Inspecteur der Invoerrechten en Accijnzen [1982]. These cases established principles regarding state liability for breaches of EU law and distinctions between fiscal measures and customs duties. Furthermore, the Court considered decisions like Weigel v Finanzlandesdirektion für Vorarlberg [2004] and OTO SpA v Ministero delle Finanze [1994], which clarified the application of VAT and the free movement of goods.

Notably, the Court examined the significance of Gaston Schul and Weigel in distinguishing between charges equivalent to customs duties and internal taxation. These precedents underscored that not all tax charges on imports equate to customs duties, especially when such charges apply uniformly to both domestic and imported goods under the VAT system.

Legal Reasoning

The core of the Supreme Court's reasoning hinged on categorizing the charge imposed by removing LVC Relief. The Court determined that this charge fell within the fiscal regime governed by article 110 TFEU, which prohibits Member States from imposing internal taxation on products of other Member States in excess of that on similar domestic products. Since VAT is a recognized turnover tax applied consistently to both domestic and imported goods, the removal of LVC Relief was deemed an internal fiscal measure rather than a customs duty or equivalent.

Additionally, the Court clarified the status of the Channel Islands under the VAT Directive. Despite being part of the EU customs union, the Channel Islands are classified as "third territories" concerning VAT, meaning EU VAT rules do not apply. Consequently, the UK's decision was assessed under the VAT framework, not the free movement of goods provisions.

The judgment also addressed JCL's reliance on general principles of EU law, such as equal treatment and non-discrimination. Drawing from cases like Faust and Swiss International Air Lines AG v Secretary of State for Energy and Climate Change [2017], the Court affirmed that these principles do not obligate Member States to treat different third territories identically, especially when such territories are outside the scope of specific EU directives like the VAT Directive.

Impact

This judgment solidifies the understanding that fiscal measures, such as VAT adjustments, are distinct from customs duties within EU law. By clarifying that VAT charges do not constitute charges having equivalent effect to customs duties, the Court provides clear guidance for future cases involving tax regulations on imports from third territories.

Furthermore, the decision emphasizes the limited applicability of general principles like equal treatment in contexts where territories are classified as third countries under specific EU directives. This delineation ensures that Member States retain discretion in managing their fiscal policies without infringing upon EU treaties governing the free movement of goods.

For businesses operating in similar jurisdictions, this judgment provides clarity on the avenues available to challenge fiscal measures and underscores the importance of correctly categorizing such charges under EU law frameworks.

Complex Concepts Simplified

Value Added Tax (VAT) and Low Value Consignment (LVC) Relief

VAT is a consumption tax levied on goods and services. LVC Relief is a measure that exempts low-value shipments from VAT to simplify the tax process and reduce administrative burdens for both businesses and consumers.

Customs Duties vs. Fiscal Measures

Customs duties are taxes imposed on goods as they enter or leave a country, directly affecting the price and movement of goods across borders. Fiscal measures, like VAT, are internal taxes applied uniformly to both domestic and imported goods, aiming to generate revenue rather than regulate trade flow.

Third Territories

Third territories are regions associated with EU Member States but are not part of the EU's VAT area. The Channel Islands, for example, are part of the EU customs union but fall outside the VAT Directive, meaning EU VAT rules do not apply to them.

Francovich Damages

Established in Francovich v Italian Republic, Francovich damages allow individuals or businesses to claim compensation from EU Member States if they suffer losses due to the latter's failure to implement EU law correctly.

Conclusion

The Supreme Court's decision in Jersey Choice Ltd v HM Treasury provides a critical clarification in the distinction between fiscal measures and customs duties within EU law. By affirming that the removal of LVC Relief is a fiscal measure governed by article 110 TFEU and not a customs duty under articles 28 and 30 TFEU, the Court dismissed JCL's claims for breaching EU free movement principles and seeking Francovich damages. This judgment reinforces the delineation of fiscal policies from trade regulations, ensuring Member States maintain autonomy over their internal taxation systems without contravening EU laws on the free movement of goods. Businesses operating in similar frameworks must heed this distinction in future regulatory and legal challenges.