Commission of the European Communities v Ireland (Case C-554/07)
Two multi-storey car parks sit side by side on a Dublin street. One is obliged to charge VAT on its parking fees, the other is not. Does this seem fair to you? The European Court of Justice doesn’t think so and, in a decision which will have a significant impact across a range of sectors, ruled that Ireland’s VAT treatment of State and local authorities will have to change. And while the case is unlikely have a significant impact on the financial services sector it does provide an interesting lesson in demonstrating the ability of the European Commission to affect tax policy in the State, writes Niall Campbell.
Summary of the case
The case involves infringement proceedings taken by the European Commission against Ireland arising from the VAT treatment afforded to State, local authorities and other entities governed by public law. While the case was initially taken by the Commission on foot of a complaint made by a private car park operator, the implications of the decision will affect numerous other sectors.
Niall Campbell
Niall Campbell

The key point that the Commission argued was that Ireland did not implement EU VAT legislation correctly: the activities of State and local authorities must be subject to VAT where there is a distortion of competition vis-a-vis private operators. So using the example above, why should a local authority gain a clear competitive advantage by not being required to charge VAT on its car parking income while a private operator must levy 21.5%? In its decision, the Court found that Ireland failed on three counts to properly implement EU VAT legislation in relation to State and local authorities. Importantly, the ECJ ruled that the activity of a State entity should be subject to VAT where:

1. A State entity engages in activities outside of its State function, or
2. A State entity, in acting in its capacity as such, is in competition with a private sector operator and the activity gives rise to a significant distortion of competition

What does the decision mean?
Firstly, Irish law will have to be amended and this is likely to occur in the next Finance Bill. More importantly however, the decision will impact on a range of State and private sector entities.

State entities
State entities will now need to assess whether their activities come within the scope of VAT. The ECJ did not provide any indication in the case as to how they should do this, but such bodies can refer to other ECJ decisions for guidance.
For instance, in the case of Isle of Wight (C-288/07)) the ECJ commented on what they considered to be significant distortion of competition, including highlighting relevant factors such as whether the competition concerned was real or merely potential. While these guidelines are helpful the impact of the Commission v Ireland case will mean a considerable burden on State entities to determine whether their activities trigger a VAT charge.

Where the activities of a State entity become VATable as a result of this decision, that entity will also need to consider whether they will bear the additional VAT cost going forward or pass this on to its customers. This could mean increases in costs for consumers as they may now be required to pay VAT on certain State and local authority charges such as car parking and waste disposal. There may also be some retrospective impact to the judgment. This will only become clear once the legislation has been amended. However, it’s not all doom and gloom for the State and local authority sector as, in circumstances where their activities are now considered to be subject to VAT, such bodies can now reclaim VAT incurred by them on associated costs.

Private sector suppliers
Private operators will welcome the changes as the competitive advantage previously enjoyed by certain State entities is removed. Many will also consider revisiting the historical position in order to assess what remedies lie open to them.

The case is likely to have wide reaching ramifications not only for State sector entities but also their competitors and consumers alike. All affected parties should now carefully consider the impact of the Commission v Ireland case both retrospectively and going forward.
Niall Campbell is a tax partner at KPMG.