JUDGMENT OF THE COURT (Sixth Chamber)

3 July 1997(1)

(VAT — Sixth Directive — Right to derogate provided for in Article 11C(1) — Norefund for barter transactions in the case of non-payment)

In Case C-330/95,

REFERENCE to the Court under Article 177 of the EC Treaty by the ValueAdded Tax Tribunal, Manchester Tribunal Centre (United Kingdom), for apreliminary ruling in the proceedings pending before that court between

Goldsmiths (Jewellers) Ltd

and

Commissioners of Customs and Excise

on the interpretation of Article 11C(1) of the Sixth Council Directive (77/388/EEC)of 17 May 1977 on the harmonization of the laws of the Member States relating toturnover taxes — Common system of value added tax: uniform basis of assessment(OJ 1977 L 145, p. 1),

THE COURT (Sixth Chamber),

composed of: G.F. Mancini, President of the Chamber, C.N. Kakouris(Rapporteur), P.J.G. Kapteyn, G. Hirsch and R. Schintgen, Judges,

Advocate General: A. La Pergola,

Registrar: L. Hewlett, Administrator,

after considering the written observations submitted on behalf of:

• Goldsmiths (Jewellers) Ltd, by Dario Garcia, Tax partner of Ernst &Young, Chartered Accountants,
  
  
• the Government of the United Kingdom, by Stephen Braviner, of theTreasury Solicitor's Department, acting as Agent, and Eleanor Sharpston,Barrister,
  
  
• the Commission of the European Communities, by Enrico Traversa andPeter Oliver, of its Legal Service, acting as Agents,

having regard to the Report for the Hearing,

after hearing the oral observations of Goldsmiths (Jewellers) Ltd, represented byDario Garcia, of the Government of the United Kingdom, represented by JohnE. Collins, Assistant Treasury Solicitor, acting as Agent, and Eleanor Sharpston,Barrister, of the German Government, represented by Ernst Röder, Ministerialratin the Federal Ministry for the Economy, acting as Agent, and of the Commission,at the hearing on 8 January 1997,

after hearing the Opinion of the Advocate General at the sitting on 27 February1997,

gives the following

Judgment

1. By order of 19 December 1994, received at the Court on 19 October 1995, theValue Added Tax Tribunal, Manchester Tribunal Centre, referred to the Court fora preliminary ruling under Article 177 of the EC Treaty a question on theinterpretation of Article 11C(1) of the Sixth Council Directive (77/388/EEC) of 17May 1977 on the harmonization of the laws of the Member States relating toturnover taxes — Common system of value added tax: uniform basis of assessment(OJ 1977 L 145, p. 1, 'the Sixth Directive‘).
   
   
2. That question was raised in proceedings between Goldsmiths (Jewellers) Ltd('Goldsmiths‘) and the Commissioners of Customs and Excise ('theCommissioners‘), who are responsible for the collection of value added tax('VAT‘) in the United Kingdom, concerning the refund of sums paid byGoldsmiths by way of VAT.
   
   
3. It is apparent from the documents before the Court that Goldsmiths, amanufacturer and supplier of jewellery, concluded with RRI Ltd ('RRI‘), acompany whose business consisted of arranging exchanges of goods for servicessupplied by it, a contract under which Goldsmiths was to supply RRI with jewelsin exchange for certain advertising services.
   
   
4. In pursuance of that agreement, on 23 October 1991 Goldsmiths supplied RRI withjewels to the value of £202 809.47, including VAT of £30 205.67. It accordinglybecame entitled to the advertising services to be provided by RRI to exactly thesame value, including VAT.
   
   
5. On 28 February 1992 Goldsmiths sent RRI a VAT invoice recording thetransaction; in addition, it declared that supply in its VAT return for the periodfrom 1 September 1991 to 30 November 1991 and paid the corresponding VAT tothe tax authorities.
   
   
6. Subsequently, in pursuance of that agreement, RRI supplied advertising services toGoldsmiths to the value of £68 678.03, including VAT of £9 335.
   
   
7. However, after providing further advertising services, RRI became insolvent andwas wound up before it could perform all its obligations under the barter contractconcluded with Goldsmiths. The value of the advertising services which could notbe supplied to Goldsmiths amounted to £135 162.12, including VAT of £20 130.53.
   
   
8. Taking the view that the advertising services still outstanding would not now beprovided, Goldsmiths adjusted its VAT declaration for the period ending on 28February 1993, reducing the net amount of VAT due by £20 130, that is to say, theamount of VAT corresponding to the advertising services not provided by RRI.
   
   
9. By decision of 1 June 1993, the Commissioners refused to allow that adjustmentand issued Goldsmiths with a VAT assessment of £20 130 plus interest. Thatdecision was based on section 11 of the Finance Act 1990, applicable at thematerial time, which provided that the right to refund of VAT in the case of baddebts was subject to the condition inter alia that the goods or services weresupplied for a consideration in money. According to the Commissioners, since theagreement concluded between Goldsmiths and RRI did not entail any pecuniaryconsideration, it was not possible to refund the VAT to Goldsmiths.
   
   
10. Goldsmiths continued to adhere to its point of view and appealed to the VATTribunal, Manchester Tribunal Centre, against the Commissioners' decision, relyingon Article 11C(1) of the Sixth Directive, which is worded as follows:
    
    'In the case of cancellation, refusal or total or partial non-payment, or where theprice is reduced after the supply takes place, the taxable amount shall be reducedaccordingly under conditions which shall be determined by the Member States.
    
    However, in the case of total or partial non-payment, Member States may derogatefrom this rule.‘
    
    
11. In its appeal, Goldsmiths claimed that section 11 of the Finance Act 1990, whichimplemented that provision in the United Kingdom, could not limit tax relief to thecase of non-payment of consideration in money but should extend it to the case ofconsideration in kind. From that it deduced that section 11 of the Finance Act1990 was contrary to Article 11C(1) of the Sixth Directive. Goldsmiths added thatwhile that provision gave the Member States the power to exclude bad debt reliefentirely, it did not entitle them to do so in part, namely for certain types oftransactions, since the power to derogate constitutes an 'all or nothing‘ power.
    
    
12. By contrast, the Commissioners maintained essentially that the Sixth Directive hadbeen correctly implemented by the United Kingdom since the power to derogateunder Article 11C(1) was not subject to any condition. Non-application does notmean that the Member States have to take an 'all or nothing‘ approach but thatthey have power not to apply the rule as it stands. According to theCommissioners, that approach is more consistent with the objective of the SixthDirective.
    
    
13. Uncertain as to the interpretation of the Sixth Directive, the VAT Tribunal,Manchester Tribunal Centre, decided to stay proceedings and refer the followingquestion to the Court for a preliminary ruling:
    
    'Is the derogation contained in Article 11C(1) of the EC Sixth Council Directiveof 17 May 1977 on the harmonization of the laws of the Member States relating toturnover taxes — Common system of value added tax: uniform basis of assessment(77/388/EEC) (”the Sixth Directive") to be interpreted as permitting a MemberState which enacts provisions for the refund of tax in the case of bad debts toexclude relief where the consideration lost consists of something other thanmoney?‘
    
    
14. In order to answer that question, it should be borne in mind that Article 11A(1)(a)of the Sixth Directive provides, with a view to harmonizing the taxable amount, thatwithin the territory of the country the amount chargeable in respect of supplies ofgoods is everything which constitutes the consideration which has been or is to beobtained by the supplier from the purchaser, the customer or a third party.
    
    
15. That provision embodies one of the fundamental principles of the Sixth Directive,according to which the basis of assessment is the consideration actually received(Case 230/87 Naturally Yours Cosmetics v Commissioners of Customs and Excise[1988] ECR 6365, paragraph 16) and the corollary of which is that the taxauthorities may not in any circumstances charge an amount of VAT exceeding thetax paid by the taxable person (Case C-317/94 Gibbs v Commissioners of Customsand Excise [1996] ECR I-5339, paragraph 24).
    
    
16. In accordance with that principle, the first subparagraph of Article 11C(1) of theSixth Directive defines the cases in which the Member States are required toensure that the taxable amount is reduced accordingly, under conditions which areto be determined by the Member States themselves. That provision thereforerequires the Member States to reduce the taxable amount and, consequently, theamount of VAT payable by the taxable person whenever, after a transaction hasbeen concluded, part or all of the consideration has not been received by thetaxable person.
    
    
17. Nevertheless, the second subparagraph of Article 11C(1) of the Sixth Directivepermits the Member States to derogate from the abovementioned rule in the caseof total or partial non-payment.
    
    
18. The power to derogate, which is strictly limited to the latter situation, is based onthe notion that in certain circumstances and because of the legal situationprevailing in the Member State concerned, non-payment of consideration may bedifficult to establish or may only be temporary. It follows that the exercise of thatpower must be justified if the measures taken by the Member States for itsimplementation are not to undermine the objective of fiscal harmonization pursuedby the Sixth Directive.
    
    
19. With regard to section 11 of the Finance Act 1990, the United Kingdom seeks tojustify the refusal to refund the tax on the ground that there is a greater risk ofevasion where the unpaid consideration is not expressed in money.
    
    
20. That justification is unacceptable for two reasons.
    
    
21. First, it is clear from Case 324/82 Commission v Belgium [1984] ECR 1861,paragraph 29, that measures intended to prevent tax evasion or avoidance may notin principle derogate from the basis for charging VAT laid down in Article 11 ofthe Sixth Directive, except within the limits strictly necessary for achieving thatspecific aim.
    
    
22. By excluding, generally and systematically, all transactions alike in which theconsideration is not expressed in money from the refund of VAT, legislation of thekind at issue in the main proceedings alters the taxable amount for that class oftransactions in a manner which goes beyond what is strictly necessary in order toavoid the risk of tax evasion. That is all the more obvious because in thecircumstances of the case, as the United Kingdom Government acknowledges in itswritten observations, there was no risk of evasion.
    
    
23. Second, no distinction between consideration in money and consideration in kindis drawn in either Article 11A(1)(a) or Article 11C(1). As is apparent from thejudgment in Naturally Yours, cited above, paragraph 16, for those provisions toapply it is sufficient if the consideration is capable of being expressed in money (seealso Case C-33/93 Empire Stores v Commissioners of Customs and Excise [1994]ECR I-2329, paragraph 12). Since the two situations are, economically andcommercially speaking, identical, the Sixth Directive treats the two kinds ofconsideration in the same way.
    
    
24. It follows that the refusal to refund VAT in the case of transactions in which theconsideration is to be paid in kind, where such consideration is not paid in wholeor in part, leads to discrimination against transactions of that type as comparedwith those in which the consideration is expressed in money.
    
    
25. A distinction of the kind made by the legislation at issue discourages traders fromentering into barter contracts, although such contracts are not, in financial orcommercial terms, in any way different from transactions in which the considerationis expressed in money, and consequently restricts traders' freedom to choose thecontract which they consider to be most suited to satisfying their economic interests.
    
    
26. In light of the foregoing considerations, the answer to the question referred mustbe that, on a proper construction, the derogation provided for in the secondsubparagraph of Article 11C(1) of the Sixth Directive does not authorize a MemberState which enacts provisions for the refund of VAT in the case of total or partialnon-payment of the consideration to refuse that refund where the unpaidconsideration is in kind, when it permits a refund where the consideration isexpressed in money.
    
    
27. During the hearing, the United Kingdom Government asked the Court, in the eventof the latter construing the derogation in question as not authorizing a MemberState to refuse the refund of VAT where the unpaid consideration is in kind, tolimit the temporal effects of its judgment. In substance, it argued on this point thatsuch a construction would raise very serious problems for the United Kingdom andother Member States which had interpreted the derogation in good faith.
    
    
28. In that regard, it should be noted that the United Kingdom Government has notput forward any tangible proof of the serious problems which it alleges would arisefrom that construction of the derogation in question. It follows that, in thecircumstances, there is no evidence to support a departure from the principle thata ruling on interpretation takes effect as from the date on which the ruleinterpreted came into force.
    
    Costs
    
    
29. The costs incurred by the German and United Kingdom Governments and theCommission of the European Communities, which have submitted observations tothe Court, are not recoverable. Since these proceedings are, for the parties to themain proceedings, a step in the proceedings pending before the national court, thedecision on costs is a matter for that court.
    
    On those grounds,

    THE COURT (Sixth Chamber),

    in answer to the question referred to it by the Value Added Tax Tribunal,Manchester Tribunal Centre, by order of 19 December 1994, hereby rules:
    
    On a proper construction, the derogation provided for in the second subparagraphof Article 11C(1) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 onthe harmonization of the laws of the Member States relating to turnover taxes —Common system of value added tax: uniform basis of assessment — does notauthorize a Member State which enacts provisions for the refund of VAT in thecase of total or partial non-payment of the consideration to refuse that refundwhere the unpaid consideration is in kind, when it permits a refund where theconsideration is expressed in money.
    
    
    

ManciniKakouris Kapteyn         Hirsch                        Schintgen

Delivered in open court in Luxembourg on 3 July 1997.

R. Grass

G.F. Mancini

Registrar

President of the Sixth Chamber

1: Language of the case: English.