VATGPB3330 - Non-business activities: distortions of competition: distortion principles

The Court in Northumbria commented on the following.

Area

Referencing Isle of Wight, the Court explained that when considering distortion, it should be considered at a national, rather than local level. Distortion should be established by reference to the activity and not factor in local market conditions.

Scope for competition

When considering if a supply is in competition, it is necessary to consider not only existing actual competition, but also potential competition. This does not extend as far as having to consider purely theoretical competition.

The Court quoted Isle of Wight, discussing the wording now covered by Section 41A(3) of the VAT Act 1994. With the phrase ‘would lead to significant distortions of competition’ the words ‘would lead to’ are ‘to be interpreted as encompassing not only actual competition, but also potential competition, provided that the possibility of a private operator entering the relevant market is real.’

Quoting from National Roads Authority, the Court clarified that where there is only a purely theoretical possibility of a private operator entering a market, this will not indicate distortion in itself.

What is meant by significant distortion

The Court again quoted from Isle of Wight to determine that ‘significant’ meant ‘more than negligible’.

Burden of proof 

It is accepted that the burden of establishing a significant distortion of competition rests with HMRC. However, the Supreme Court emphasised that this does not require HMRC to undertake detailed economic modelling or commission expert evidence in every case.

Instead, HMRC is entitled to rely on logical, common‑sense propositions - such as the general expectation that differential tax treatment ordinarily distorts competition, reflecting the CJEU’s observations in Rank and the tribunal’s reasoning in Isle of Wight that consumers generally prefer cheaper like‑for‑like services. Even so, a public authority remains free to adduce evidence showing that, in its specific circumstances, no distortion would arise. HMRC will take that evidence into account in reaching its conclusion.