Important legal notice
Opinion of Mr Advocate General Jacobs delivered on 8 February 1990. - Peter John Krier Tither v Commissioners of Inland Revenue. - Reference for a preliminary ruling: Special Commissioners of Income Tax - United Kingdom. - Protocol on the Privileges and Immunities of the Communities - Deduction of mortgage interest. - Case C-333/88.
European Court reports 1990 Page I-01133
Opinion of the Advocate-General
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My Lords,
1 . This case comes before the Court by way of a reference for a preliminary ruling from a United Kingdom tax tribunal, the Special Commissioners of Income Tax . In the main action, Mr Tither is challenging the refusal of the Commissioners of Inland Revenue (" the Board ") to enable him to take advantage of a scheme known as Miras ( mortgage interest relief at source ) when paying interest on a loan he wished to obtain to make improvements to his house . Mr Tither was at the material time an official of the Commission of the European Communities and the case turns on the proper construction of Article 13 of the Protocol on the Privileges and Immunities of the European Communities (" the Protocol ").
The facts
2 . In 1977, Mr Tither bought a property known as The Old Steam Bakery at Heoly Bont, Cydweli in Dyfed, Wales . For that purpose, he obtained a State-subsidized loan known as an option mortgage from Llanelli Borough Council of UKL 9 000 . In August 1978, Mr Tither entered the service of the Commission . Under Article 13 of the Protocol, he thereupon became liable to a tax for the benefit of the Communities on emoluments paid to him by the Communities, but enjoyed exemption from national taxes on those emoluments . In 1982, Mr Tither decided to make some improvements to The Old Steam Bakery and arranged a building society loan which would have brought the total amount of his borrowing up to UKL 25 000 . As I shall explain, this was then the limit on the amount of a loan for which tax relief could be claimed . However, he was unable to obtain the Board' s authority to operate the Miras scheme and did not therefore take up the loan, with the result that the improvements have not been made . Mr Tither appealed to the Special Commissioners against the Board' s refusal to allow the Miras scheme to be operated and on 15 November 1988 the Special Commissioners made a reference to this Court under Article 177 of the EEC Treaty . The questions referred are as follows :
"Where a Member State subsidizes interest paid by an individual on a loan to purchase or improve his main residence situated within that State if his income taxable in that State is less than the amount of those payments, but does not subsidize such payments in those circumstances if he or his spouse is in receipt of a salary which is not taxable in that State because of a special exemption or immunity :
( 1 ) Is
( a ) Article 13 of the Protocol on the Privileges and Immunities of the European Communities, or
( b ) Article 5, or
( c ) Article 7 of the Treaty establishing the European Economic Community, or
( d ) any other provision of Community law
to be interpreted as imposing an obligation on that Member State to subsidize such payments of interest by an individual who is a national of that State and who is in receipt of a salary which is exempt from tax in that State by virtue of the said Article 13 and whose income taxable in that State is less than the amount of those payments?
( 2 ) If the Member State is under such an obligation as is mentioned in question 1 above, is such an individual entitled as a matter of Community law to rely on the said obligation in the courts and tribunals of the Member State if the national law of that Member State does not implement that obligation?"
United Kingdom income tax and the Miras scheme
3 . In order to answer the questions referred, it is necessary to consider the basic features of the United Kingdom income tax system and the way it treats interest on loans taken out for the purpose of purchasing or, until recently, improving a home .
4 . Income tax is a tax on the income of individuals, partners and trustees . An individual taxpayer is normally exempt from tax on the first slice of his income . Thereafter, he becomes liable to tax at the basic rate . If his income exceeds a certain figure, he also becomes liable to pay income tax on the excess at a higher rate .
5 . In order to promote home ownership, the United Kingdom tax system has for a number of years offered encouragement to people wishing to buy a home . Such purchases are normally financed by a loan from a building society or other institutional lender secured by a mortgage or charge over the property purchased . Before 1982, the amount of the interest on the loan, which usually varies in line with market rates, was deducted from the borrower' s income chargeable to tax to the extent that the loan did not exceed a certain limit . Under this system, which remains applicable in certain circumstances, mortgage interest was paid in full to the lender . The borrower either claimed relief from the Board at the end of each tax year or, if he was an employee, was awarded relief through the Pay As You Earn ( PAYE ) system, under which employers deduct income tax at source from the salaries paid to their employees .
6 . In order to obtain full relief under these arrangements, the borrower needed to have sufficient taxable income to cover the mortgage interest . Before the introduction of the Miras system, an alternative for a borrower whose taxable income was insufficient to cover the mortgage interest was to take out a form of subsidized loan known as an option mortgage under a scheme introduced by the Housing Subsidies Act 1967 and operated by the government in conjunction with local authorities and certain lenders .
7 . Under the option mortgage scheme, borrowers could elect to pay mortgage interest at a rate below the current market rate, the balance being made good to the lender by the government . In return for receiving this State subsidy, borrowers lost the right to tax relief on the interest they actually paid to the lender . For a borrower with sufficient taxable income to cover the mortgage interest, the option mortgage scheme might be less favourable than the normal arrangements for claiming tax relief in respect of payments of interest . For a borrower whose taxable income was inadequate to cover the mortgage interest, option mortgages made available a subsidy broadly equivalent to the amount of tax relief to which he would otherwise have been entitled . One feature of the option mortgage scheme, however, was that foreign diplomats and others resident in the United Kingdom whose income was exempt from income tax could obtain option mortgages under the 1967 Act . The subsidy paid by the government was never intended for such individuals .
8 . The Finance Act 1982 introduced a new system for granting assistance to people wishing to buy a home . That system is commonly known as Miras and it is the Board' s refusal to allow Mr Tither to operate it which lies at the heart of these proceedings . The statutory provisions dealing with Miras were at the material time contained in the 1982 Act . They are now to be found in the Income and Corporation Taxes Act 1988, but their essence has not changed .
9 . Miras replaced both the option mortgage scheme and the old arrangements for granting relief in respect of mortgage interest from income tax at the basic rate . Under the Miras scheme, wherever there is a payment of "relevant loan interest" to a "qualifying lender" by a "qualifying borrower", the borrower may, on making the payment, "deduct and retain out of it a sum equal to income tax thereon at the basic rate" ( Section 26(1 ), Finance Act 1982 ). The lender is obliged to allow the deduction and can recover an equivalent amount from the Board . Where the interest is fully covered by the borrower' s taxable income, the end result is the same as under the old system for granting tax relief . However, unlike that system, the Miras scheme does not depend upon the borrower having sufficient taxable income to cover the mortgage interest . It is available to all qualifying borrowers, regardless of their tax position .
10 . It should be noted that the Miras scheme only permits the deduction of sums equivalent to income tax at the basic rate . If the borrower is subject to income tax at the higher rate, relief on the difference between the two rates is only available under the old arrangements for the deduction of interest from the borrower' s taxable income through the PAYE system or through an assessment made by the Inland Revenue . Moreover, as with the old system, there is a statutory limit on the amount of loan for which the advantages of Miras are available . That limit is currently UKL 30 000, having been increased with effect from the tax year 1984/85 from UKL 25 000 .
11 . A borrower is not entitled to take advantage of the Miras scheme until certain formalities have been completed . In Mr Tither' s case, this meant that he could not do so until the Board had given notice both to him and to the lender that an amount equivalent to basic rate income tax could be deducted from the payments of interest . When Mr Tither applied to the Board for such a notice to be issued in respect of the loan he had negotiated, his application was rejected on the basis that he was not a "qualifying borrower ". At the material time, this expression was defined by paragraph 13 of Schedule 7 to the Finance Act 1982 . The relevant part of that paragraph was subparagraph 2 . This provided that a borrower holding an office or employment in respect of the emoluments of which he was not chargeable to income tax by reason of "some special exemption or immunity" was not a qualifying borrower . It will be observed that the 1982 Act therefore excluded from the Miras scheme certain individuals who were able to obtain option mortgages under the Housing Subsidies Act 1967 but for whom the subsidy paid by the government under that Act had not been intended .
12 . The Board took the view that Mr Tither was covered by paragraph 13(2 ) of Schedule 7 to the Finance Act 1982 as a result of Article 13 of the Protocol . This provides :
"Officials and other servants of the Communities shall be liable to a tax for the benefit of the Communities on salaries, wages and emoluments paid to them by the Communities ...
They shall be exempt from national taxes on salaries, wages and emoluments paid by the Communities ."
It should be noted in addition that the first sentence of Article 14 of the Protocol provides :
"In the application of income tax ..., officials and other servants of the Communities who, solely by reason of the performance of their duties in the service of the Communities, establish their residence in the territory of a Member State other than their country of domicile for tax purposes at the time of entering the service of the Communities, shall be considered, both in the country of their actual residence and in the country of domicile for tax purposes, as having maintained their domicile in the latter country provided that it is a member of the Communities ."
13 . For the sake of completeness, I should add that "relevant loan interest" is interest paid on a loan for the purchase of inter alia land in the United Kingdom used as the only or main residence by the borrower or a dependent relative or former or separated spouse of his . At the material time, it also extended to loans taken out to finance a range of home improvements . The expression "qualifying lender" covers a number of bodies, the most important of which are building societies, local authorities and certain insurance companies . It is not disputed that interest paid on the loan which Mr Tither was proposing to take out would have constituted "relevant loan interest", nor that the institution from which he had arranged to borrow the money was a "qualifying lender ".
14 . The issue raised by this reference is essentially whether the Board' s refusal to allow Mr Tither to operate the Miras scheme is compatible with Article 13 of the Protocol . Before the Commissioners, the case is proceeding on the basis that at all material times Mr Tither was resident and ordinarily resident ( i.e . fiscally domiciled ) in the United Kingdom and that he would have been liable to United Kingdom income tax on emoluments paid to him by the Commission had it not been for Article 13 of the Protocol . It follows that, in the absence of the exemption from national taxes which that provision confers, Mr Tither would have been entitled to operate the Miras scheme . Moreover, if Mr Tither had sufficient taxable income in the United Kingdom falling outside Article 13 of the Protocol, he would be able to obtain tax relief under the arrangements which were in force before Miras was introduced by setting against that income the interest payable on the loan he wished to obtain . The arrangements for deducting interest from a borrower' s taxable income still exist alongside the new system, although they cannot be operated to the extent that the Miras scheme is applicable .
The Court' s case-law
15 . The Court has examined on a number of occasions the scope of the exemption from national taxes granted to officials and other servants of the Communities . In Case 6/60 Humblet v Belgium (( 1960 )) ECR 559, it was asked to consider a personal surtax levied under Belgian law on a person' s income in addition to ordinary income tax . The surtax was levied on the aggregate income of a husband and wife and the rate increased with successive bands of income . Mr Humblet was an official of the ECSC and a Belgian national . In the disputed assessment of liability to tax, the Belgian tax authorities had added his net remuneration from the Community to the income of his spouse . The result was that the latter income was liable to tax at a substantially higher rate than would have been the case had Mr Humblet' s emoluments been disregarded .
16 . The Court held that this was incompatible with Article 11(b ) of the Protocol on the Privileges and Immunities of the ECSC, which was in basically the same terms as the provision at issue in this case . The Court said that Article 11 indicated "clearly and unambiguously exemption from any fiscal charge based directly or indirectly on the exempted remuneration" ( p . 574 ). It went on to examine in some detail the purpose of that exemption . The Court said that it was necessary for the Community to have the power to fix the net income of its officials because only in this way could the institutions evaluate the services of their officials and officials assess the posts offered to them . Moreover, exemption from national taxes was indispensable if equality of remuneration for officials of equivalent rank but different nationality was to be guaranteed . "The essential comparison", said the Court, "... must be between Community officials of different nationalities receiving the same gross remuneration and having also in their respective countries equal amounts of other taxable income" ( p . 580 ). As a result, "any taxation, direct or indirect, of income which is not within the jurisdiction of the Member States" was excluded ( p . 578 ).
17 . In Case 32/67 Van Leeuwen v Rotterdam (( 1968 )) ECR 43, the Court was asked to consider the compatibility with Article 12 of the Protocol on Privileges and Immunities annexed to the EEC Treaty ( the forerunner of the provision at issue in this case ) of a school levy payable under Dutch law . The amount of the levy varied according to the parent' s income tax liability . Where a parent was wholly or partly exempt from income tax, however, he became liable to the maximum levy unless he could prove that, if the exemption did not apply, he would be liable to pay a lesser sum .
18 . The Court held that Article 12 covered all national taxes on salaries, "no matter what form such taxes take or whatever they are called" ( p . 48 ). However, it did not extend to "charges and dues required as a consideration for a given service supplied by public authorities ". This was so even where "the amount of the charge to be paid is determined by reference to the income of the person concerned" ( ibid ). The Dutch authorities were therefore entitled to take account of the salary paid to an EEC official in calculating his liability to pay the levy .
19 . The most recent case of relevance in these proceedings is Case 260/86 Commission v Belgium (( 1988 )) ECR 955, which concerned the compatibility with the Protocol of a Belgian law imposing a tax on income from real property situated in Belgium . The tax was payable by the owner of the property but the rate could be reduced according to the social circumstances of the occupant . The occupant was entitled to deduct an appropriate amount from the rent . However, no reduction was applicable where the property was occupied "by a tenant who, either himself or on account of his spouse, is exempt from the tax on natural persons by virtue of international conventions ". Accordingly, no reduction was granted where the tenant or his spouse was a Community official .
20 . The Court held that the relevant Belgian legislation was incompatible with Article 13 of the Protocol . That provision, the Court said,
"precludes any national tax, regardless of its nature and the manner in which it is levied, which is imposed directly or indirectly on officials and other servants of the Communities by reason of the fact that they are in receipt of remuneration paid by the Communities, even if the tax in question is not calculated by reference to the amount of that remuneration" ( paragraph 10 ).
As the Court explained, the financial burden of the tax was passed on by the landlord of the property to the tenants, as was apparent from the provision that reductions in the tax could be deducted from the rent . Thus, where the tenant or his spouse was a Community official but would otherwise have been entitled to a reduction, they were forced to bear an additional financial charge "for the precise reason that they are in receipt of remuneration which is exempt from national taxes" ( paragraph 12 ).
The questions referred
21 . The United Kingdom Government denies that the refusal to permit Mr Tither to operate Miras contravenes Article 13 of the Protocol, as his net remuneration from the Community is not affected . The only effect the denial of Miras has, so it is claimed, is to disallow a subsidy . Thus, refusing to allow him to operate Miras affects not the calculation of his remuneration but its application, a matter outside the scope of Article 13 .
22 . Mr Tither, supported by the Commission, takes the opposite view . He contends that a fiscal advantage or subsidy which is generally available, namely the Miras scheme, has been withheld from him solely as a result of his employment by the Communities . He submits that the withdrawal of a subsidy which is otherwise generally available constitutes an indirect fiscal charge, the legal basis for the imposition of which is the fact that he is in receipt of a salary from the Communities . As a result, he says, the Communities' right to fix his net remuneration has been prejudiced .
23 . In my view, the Court' s case-law establishes that the expression "national taxes" in Article 13 of the Protocol is to be construed broadly . Be that as it may, it is only where a Member State seeks to subject officials and other servants of the Community to some form of fiscal charge on the emoluments paid to them by the Community that Article 13 can bite . It is true, as Commission v Belgium, cited above, demonstrates, that the charge need only be indirect . Thus, the denial of a tax relief may fall within the scope of Article 13 because the result will be to increase a person' s liability to tax . However, in the absence of any direct or indirect charge to tax, I consider Article 13 to be inapplicable .
24 . How, then, is the Miras scheme to be characterized for these purposes? The United Kingdom suggested in its written observations that the scheme has a twofold function : it is part tax relief, part subsidy . In my view it can be regarded in all cases as a subsidy : in all cases, its effect is to subsidize mortgage interest payments . It is right to say, however, that the nature of the subsidy is wholly different in the case of taxpayers and non-taxpayers respectively . This is clearly demonstrated by the worked examples provided by the United Kingdom, in response to a request from the Court, illustrating the effects of the Miras scheme for borrowers . Those examples show that in the case of a taxpayer with income subject to United Kingdom income tax which is sufficient to cover any relevant loan interest for which he is liable, the Miras scheme has the same effect as deducting the gross amount of the interest from his income chargeable to tax . However, in the case of a person with no income subject to United Kingdom income tax but who is permitted to operate the Miras scheme in respect of relevant loan interest, the result is that the Inland Revenue receives nothing from the borrower but still pays out money to the lender and therefore suffers a net loss . Thus the scheme is indeed hybrid : it operates, for taxpayers, as a form of tax relief; for non-taxpayers, it confers a non-fiscal financial benefit .
25 . The hybrid nature of the Miras scheme is due to its history as an adjunct to the traditional system of conferring relief from income tax for payments of interest and as a replacement for the option mortgage scheme . However, in the case of someone like Mr Tither with no taxable income, the Miras scheme could only operate to confer a non-fiscal financial benefit .
26 . Accordingly, although the Miras scheme is administered through the tax system, the Board' s refusal to allow Mr Tither to operate it cannot be said to result in the imposition on him, even indirectly, of a fiscal charge he would not otherwise have to bear . Although that refusal was based on Mr Tither' s immunity from national taxes under Article 13 of the Protocol, the effect was simply to exclude him from a form of financial assistance which might otherwise have been payable . It is for this reason that the instant case can be distinguished from Commission v Belgium, for there the sums paid by landlords to the Belgian tax authorities were indirectly borne by their tenants . Broad though Article 13 of the Protocol undoubtedly is, it does not in my view require Member States to grant financial assistance in circumstances such as those at issue here .
27 . My conclusion on this point is not affected by the fact that the Miras scheme is administered by the tax authorities, nor by the fact that the benefit claimed by Mr Tither is calculated by reference to the basic rate of income tax . These are matters of form only which could readily be changed without affecting the substance of the arrangements in issue . What Mr Tither is claiming is in substance a non-fiscal financial benefit, not relief from any fiscal charge, direct or indirect . It will be noted, although the point has no direct bearing on this case, that a person excluded from Miras because of an immunity from tax will be entitled to tax relief if he has sufficient taxable income to cover the interest on the proposed loan . This is because, as pointed out above, a person who does not qualify for the Miras scheme but who has taxable income can still obtain tax relief on mortgage interest outside that scheme by setting the interest against that income . In consequence, whether a person is a taxpayer or not, a refusal to allow him to operate the Miras scheme does not constitute, under the legislation in force, the refusal of a tax relief .
28 . I conclude that Article 13 of the Protocol does not prevent the Board from refusing to allow Mr Tither to operate the Miras scheme by reason of the fact that, at the material time, he was exempt from national taxes on his Commission salary .
29 . The question whether or not Article 13 produces direct effect can be dealt with briefly . The United Kingdom Government accepts that if, contrary to its submissions, the refusal of the Board to allow Mr Tither to operate the Miras scheme is contrary to Article 13 of the Protocol, Mr Tither is entitled to rely on that provision before the courts and tribunals of the United Kingdom . I consider this to be correct . Should the Court decide that legislation such as that in issue in these proceedings is contrary to Article 13, that provision is, in my view, clear and precise enough to produce direct effect .
30 . With regard to Article 5 of the Treaty, I do not consider this provision to be of any assistance to Mr Tither, since it does not in my view add anything to Article 13 of the Protocol . The present case may in this respect be contrasted with Case 44/84 Hurd v Jones (( 1986 )) ECR 29, where Article 5 was held, independently of other provisions of Community law, to prohibit Member States from subjecting to domestic taxation the salaries paid by the European Schools to their teachers, where the burden of such taxation was borne by the Community budget . Even if Article 5 were thought in the present case to go further than Article 13 of the Protocol, it is unlikely that it would produce direct effect in such circumstances : see the Hurd case, supra, paragraph 3 of the operative part of the judgment .
31 . As far as Article 7 of the Treaty is concerned, counsel for Mr Tither sensibly conceded at the hearing that he no longer wished to rely on this provision . It is clear that Mr Tither' s nationality was not taken into account by the Board in refusing him permission to operate the Miras scheme . I do not consider any provisions of Community law other than those discussed above to be relevant to the outcome of this case .
32 . I therefore take the view that the questions submitted by the Special Commissioners should be answered as follows :
"Where a Member State subsidizes interest paid by an individual on a loan to purchase or improve his main residence situated within that State if his income taxable in that State is less than the amount of the interest paid, neither Article 13 of the Protocol on the Privileges and Immunities of the European Communities nor any other provision of Community law precludes that State from refusing to subsidize such payments of interest by an individual who is domiciled there for tax purposes and is an official or other servant of the Communities to the extent that his income taxable in that State is less than the amount of those payments ."
(*) Original language : English .
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