Jersey Choice Ltd, a Jersey horticultural company, claimed Francovich damages against HM Treasury for removing VAT low value consignment relief on mail order goods from the Channel Islands. The Supreme Court dismissed the appeal, holding the charge was a fiscal measure, not a customs duty, and Jersey was a third territory to which the EU principle of equal treatment did not apply.
Background
Jersey Choice Ltd (‘JCL’) is a Jersey-registered company that grows horticultural products and exports them by mail order to consumers in the United Kingdom in small, low-value packets. While the UK was an EU Member State, these goods attracted low value consignment relief (‘LVC Relief’), exempting them from import VAT. His Majesty’s Treasury (‘HMT’), concerned about the abuse of LVC Relief through a practice known as ’round-tripping’ — whereby UK retailers shipped goods to the Channel Islands and back in small parcels to avoid VAT — enacted section 199 of the Finance Act 2012, removing LVC Relief for goods sent by mail order from the Channel Islands with effect from 1 April 2012. The relief was not removed for imports from other territories listed in Article 6(1) of the VAT Directive.
JCL commenced proceedings on 29 March 2018 claiming Francovich damages, alleging that the selective withdrawal of LVC Relief breached EU law, specifically Articles 28, 30 and 34 TFEU (free movement of goods) and general principles of EU law including equal treatment, fiscal neutrality and proportionality. The claim was struck out at first instance by HHJ Johns QC and the Court of Appeal (Green, Arnold and Snowden LJJ) upheld that decision, save for reversing the finding of abuse of process.
The Issues
The Supreme Court identified four issues:
Issue 1: Customs regime or fiscal regime?
Did the reimposition of VAT following removal of LVC Relief amount to a charge having equivalent effect to a customs duty under Articles 28 and 30 TFEU, or was it a fiscal measure to be assessed under Articles 110 and 113 TFEU?
Issue 2: General principles of EU law and Francovich damages
Could JCL, established in a territory within the EU customs union but outside the VAT Directive area, found a Francovich damages claim on the basis that the UK breached general principles of EU law (equal treatment, proportionality) when exercising its discretion under Article 23 of the Exemptions Directive?
Issue 3: Fundamental rights
Did the Court of Appeal fail to protect JCL’s fundamental rights under the TEU, the EU Charter of Fundamental Rights, and the ECHR?
Issue 4: Remedies
What remedies, if any, should be afforded if JCL succeeded on any ground?
The Court’s Reasoning
Issue 1: The charge falls within the fiscal regime
The Court, in a unanimous judgment given by Lord Lloyd-Jones and Lady Rose, held that the EU customs and fiscal regimes are mutually exclusive. Drawing on established CJEU jurisprudence, they identified a two-stage test. First, a charge having equivalent effect to a customs duty must affect only imported products as such. Second, even if it does, it will not be so characterised if it forms part of a general system of internal dues applied systematically to categories of products according to objective criteria irrespective of origin.
The Court held the charge failed both tests. VAT applied equally to domestic and imported goods alike. Green LJ’s analysis in the Court of Appeal was endorsed:
the charge was to VAT which was a recognised turnover tax applied across the EU. Both the grant of the exemption and the power granted to Member States to remove the charge were expressly mandated under the Exemptions Directive, which is undoubtedly a tax law.
JCL’s argument that unlawful discrimination could convert a fiscal measure into a customs measure was rejected. The Court relied on Tulliasiamies and Siilin (Case C-101/00), where the CJEU held that a discriminatory tax charge remained a tax charge to be assessed under the fiscal regime:
Since the tax on car tax constitutes discriminatory internal taxation in so far as the amount charged as such a tax on an imported used car exceeds the amount of the residual tax incorporated in the value of a similar used car already registered in the national territory, it cannot at the same time constitute a charge having equivalent effect.
The Court also rejected JCL’s reliance on the Agricultural Flat Rate Scheme as a basis for reclassifying the charge. This point had not been pleaded, was not raised in the courts below, and in any event lacked substance because the scheme was an opt-in simplification measure expressly permitted by the VAT Directive.
Issue 2: No arguable breach of the general principle of equal treatment
The Court accepted that the general principle of equal treatment applies in the field of EU taxation, as established in NCC Construction Danmark (Case C-174/08). However, the consistent CJEU case law establishes that there is no obligation under EU law to accord equal treatment to third countries or third territories. The leading authority is Faust (Case 52/81), confirmed emphatically by the CJEU in Swiss International Air Lines (Case C-272/15):
In accordance with the Court’s settled case-law, there is in the FEU Treaty no general principle obliging the Union, in its external relations, to accord in all respects equal treatment to different third countries and traders do not in any event have the right to rely on the existence of such a principle.
The Court held that Jersey is unambiguously a ‘third territory’ for the purposes of the VAT Directive. Article 5 of the VAT Directive defines ‘third territories’ as those referred to in Article 6, which expressly includes the Channel Islands. The fact that the Channel Islands form part of the customs territory of the EU was irrelevant once the matter was properly characterised as falling within the fiscal regime. As the Court stated:
Once it has been determined that this is a tax case, and not a customs case, then Article 6(1) makes clear that the Channel Islands cannot in any way be equated with the Member States and they fall squarely into the category of non-member states to whom the protection of the general principles do not apply.
The Court further drew on Hansen (Case 148/77), noting that in that case whether a territory was treated as a Member State or third country for tax discrimination purposes turned on whether the tax laws applied to it — not whether it was within the customs union. The Channel Islands were far less integrated into the EU than Guadeloupe was at the time of Hansen.
JCL’s ‘jurisdictional void’ argument was acknowledged but not accepted. The Court noted that Jersey’s unusual status had for the most part operated to its benefit — enjoying customs union membership without the burden of the EU VAT system. The diminishment of one aspect of that advantageous position did not arguably constitute a breach of the principle of equal treatment or proportionality.
Issue 3: Fundamental rights
The Court dismissed this ground succinctly. The right to a remedy under Article 19(1) TEU and Article 47 of the Charter of Fundamental Rights arises only where there has been a breach of EU law. Since there was no arguable breach, there could be no right to a remedy, nor could JCL’s claim constitute a ‘possession’ for the purposes of Article 1 of Protocol 1 ECHR.
Issue 4: Remedies
This issue did not arise given the Court’s conclusions on Issues 1 to 3.
Practical Significance
This decision is significant in several respects. It confirms the strict mutual exclusivity of the EU customs and fiscal regimes and clarifies that even if a fiscal measure is applied in a discriminatory manner, it does not thereby become reclassified as a customs measure. It reaffirms the well-established principle that there is no obligation in EU law to accord equal treatment to different third countries or territories, and extends that principle to territories which occupy the unusual dual status of being within the customs union but outside the VAT area. The judgment also illustrates the limitations of Francovich liability in the context of the exercise of discretionary powers under secondary EU legislation affecting third territories. Finally, it serves as an important marker for the transitional regime governing EU law claims following the UK’s withdrawal from the EU, though the Court was careful not to endorse the analysis of the applicable transitional provisions, as it had not heard argument on the point.
Verdict: The appeal was dismissed. The Supreme Court upheld the strike-out of JCL’s claim, holding that the removal of low value consignment relief was a fiscal measure falling within the VAT regime and not the customs regime, that the Channel Islands were a third territory for VAT purposes to which the EU principle of equal treatment did not apply, and that JCL’s claim for Francovich damages had no reasonable prospect of success.
Source: Jersey Choice Ltd v His Majesty’s Treasury [2024] UKSC 5
