No right to damages for business affected by low value consignment relief

The High Court has rejected a claim for damages by a business adversely affected by the existence of tax free imports of CDs and DVDs from the Channel Islands prior to 2012.

The High Court has held that a business adversely affected by the operation of low value consignment relief (LVCR) for imports of goods from the Channel Islands (prior to 2012) was not entitled to bring a Francovich claim for damages against the UK Government: Allen v HM Treasury and HMRC [2019] EWHC 1010. The relevant provisions of the VAT Directives did not give the necessary individual rights which could form the basis of a Francovich damages claim.

Background

Prior to 2012, the UK exempted from VAT imports of goods from outside the UK (including the Channel Islands) provided that those imports were below a specified value. This relief was used by UK retailers to “round trip” orders for goods, such as CDs and DVDs, from UK customers by exporting them to Jersey or Guernsey (reclaiming VAT) and then reimporting them on sale to UK consumers (exempted from VAT by the LVCR).

The appellant in this case had complained about this “abuse” along with other UK retailers in the early 2000s, however it was not until 2012 that the UK removed the exemption on such imports from the Channel Islands. The appellant’s business had gone out of business with losses in 2007 and the appellant complained that this was due to its inability to compete with larger businesses able to take advantage of the LCVR. He brought a damages claim against the UK Government for its failure to properly implement the VAT legislation to prevent the abuse.

The UK Government argued that, firstly, the case should have been brought by way of judicial review, rather than a damages claim and secondly, that the appellant had no basis to make a claim for damages in this case.

Judicial review

As regards the judicial review defence, the High Court noted that judicial review is not appropriate for solely bringing a damages claim. The is set out in CPR 54.3(2) which states that a “claim for judicial review may include a claim for damages… but may not seek such a remedy alone”.

The judge (Mann J) agreed that prior to 2012 (when the UK legislation was changed) a claim for judicial review based on a claim for a remedy of a declaratory nature would have been appropriate. But that was not the case post-2012 after the UK changed the legislation. The appellant sought a remedy of damages only and the correct basis of claim was, therefore, one for damages.

Francovich

However, it was necessary for the appellant to show that it had a basis for a claim for damages based on the Francovich judgment. The first requirement identified by the ECJ in Francovich for an individual to be able to sue a Member State for the failure to correctly implement a Directive is that “the result of the directive should entail the grant of rights to individuals”. It was necessary, therefore, for the appellant to identify provisions of the Directive which conferred on him as an individual, rights which enable him to bring a damages claim.

The Court noted that the provisions in this case were very general. The Recital of the 1983 Directive (which was the relevant one at the time) stated that “exemptions on importation can be granted only on condition that they are not liable to affect the conditions of competition on the home market” and Article 1 provided that the VAT exemptions should be applied “under conditions fixed by [Member States] in order to ensure that such exemptions are correctly and simply applied and to prevent any evasion, avoidance or abuse”.

The appellant argued that these provisions gave rise to a negative obligation on the UK to ensure that competition in the home market was not negatively affected and exemptions not abused. However, the Court considered that this did not meet the requirements of the first condition for a Francovich claim. This required that “the result of the directive” (ie the object of the directive) was to grant rights to individuals. Mann J considered that the wording of the Directive relied on by the appellant was insufficient to meet that requirement.

“Those words do not, or do not sufficiently clearly, apparently confer individual rights. They are more in the nature of general qualifications to a general regime, and that is the clear impression given by other parts of the Directive, and in particular the recitals. The recitals clearly indicate that a prime objective of the Directive, along with the Sixth Directive whose objectives it is furthering, is to produce a harmonised regime across Member States.”

Comment

The decision will not come as a surprise. It is notoriously difficult to bring a Francovich damages claim against a Member State for failure to correctly implement a Directive and this claim has fallen at the first hurdle - an inability to even identify a provision intended to provide rights to individuals. Even if the appellant had managed to surmount that hurdle, it would have been necessary to show causal link between the failure and the appellant’s loss and, in addition, that the breach was one which was a “sufficiently serious” breach.

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