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HMRC internal manual

VAT Water and Sewerage Services

HM Revenue & Customs
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Supplies made in connection with water and sewerage services: the Zweckverband ECJ decision

The ECJ case of Zweckverband C-442/05 dealt with the interpretation of the term “water supplies” for the purposes of paragraph 2 of Annex H of the Sixth Directive (now Annex III of the Principal VAT Directive), which allows Member States (in this case, Germany) to apply a reduced rate for water under EU law. The court ruled that connection charges were part of the water supply and that, subject to fiscal neutrality, even if the pipe work were installed as a separate supply from the water, it would still be subject to the reduced-rate:

Article 12(3)(a) of Sixth Directive 77/388 and Category 2 of Annex H thereto must be interpreted as meaning that the laying of a mains connection which consists, as in the main proceedings, in the installation of piping permitting the connection of a building’s water system to the fixed water supply network forms part of water supplies. Furthermore, Member States may apply a reduced rate of value added tax to concrete and specific aspects of water supplies, such as the laying of mains connections at issue in the main proceedings, provided that they comply with the principle of fiscal neutrality inherent in the common system of value added tax.

We do not accept the Zweckverband ruling is legally binding on supplies of water made under VATA 1994, Schedule 8, Group 2, item 2. The EU vires for zero rating water supplies is Article 110 of the Principal VAT Directive and is a wholly separate provision from Annex III, which relates to reduced rates. Accordingly, we do not accept that the infrastructure for supplies of water (pipe work etc.) provided separately from the water falls within the scope of the zero rate.

However, under normal VAT supply principles, we do accept zero rating for first-time connection charges if they are incidental to a supply of water - see VWASS5200. Furthermore, infrastructure work in connection with water supplies supplied independently from the water may be zero- or reduced-rated under certain circumstances - see VWASS5300.