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Tax avoidance hammered Back  
In the Westmoreland case the House of Lords recently retreated from the doctrine that tax avoidance should always be treated as ineffective. Within a few months, however, the UK VAT Tribunal have adopted what seems like a similar doctrine in the area of Value Added Tax. If this is successful it could have implications in Ireland.
The UK VAT Tribunal has come out with a startling new doctrine in what is known as ‘the Halifax case’. It has stated that where transactions are carried out without commercial justification, and for tax avoidance reasons, they are not carried out in the course of a business.

If they are not carried out in the course of a business it follows, under the EU 6th Directive on Value Added Tax, that the transactions neither attract a charge of Value Added Tax nor attract the right to input credit on their costs.

Just EU laws
What is significant about the new doctrine which the Tribunal has proposed is that they say it is a straightforward application of EU law, and nothing inherently new. It is not a doctrine, they say, which they have made up themselves. They are merely interpreting the law as it stands and applying it to facts put before them. If that argument is correct, then it would follow that the same rules would apply in every member state of the EU, since VAT is an EU harmonised tax with broadly common rules throughout the community.

In other words, if the judgement in the Halifax case is correct, then it is good law in Ireland as well.

It is likely that the Halifax judgement, or one of the later judgements in which the same principles were subsequently applied by the VAT Tribunal, will end up before the European Court of Justice. Only then will we know whether the Tribunal has got it right. At present most commentators believe that they have got it fundamentally wrong. But modesty and prudence would suggest waiting for the European Court of Justice to pronounce, before assuming that that is the case.

The story thus far
What was Halifax all about? The Halifax Group are largely a financial services group. To a large extent their supplies are exempt from VAT, and their ability to obtain relief for VAT on their expenses (input credits) is accordingly restricted. A company within the group intended to have a plot of land developed for its use. Had it done so by way of direct contract with a contractor it would have suffered a denial of input credits on most of the costs, by reason of it making largely exempt supplies in its own business.

The Halifax Group, behaving as very many others have done in similar circumstances, did not adopt the most tax expensive approach they could find, but sought a more tax efficient method of achieving their economic objective of occupying suitable property for their business. The actual series of transactions they entered into were complex (and too lengthy to describe here) but broadly amounted to having the property developed by one group company for the purposes of renting it to one of the partially exempt Halifax group companies.

The company which developed the property charged VAT on the rental and hoped to recover all of its input credits on the up front costs of development. In the long run the VAT position would end up being much the same as if the Halifax company which occupied the property had actually had it developed directly. It would suffer VAT on the rentals and not be able to fully recover that VAT as input credits, instead of suffering VAT on development costs up front, and being denied input credit on that. Time is money, and a problem deferred is a problem solved to a large extent.

Objectively, it would seem that all of the companies involved were entering into legitimate transactions on which they expected to earn income, and a profit. The company which carried out the construction work carried out real economic activities at a profit. The company which caused the building to be developed, and which let it, engaged in real economic activity, and would in due course earn a profit. The company which occupied the property did so for the purpose of its business and paid a straightforward rent.

Surprisingly, the Tribunal took the view that the approach adopted by the Halifax, when contrasted with the alternative approach they could have taken (direct development by the occupying company) revealed no real economic activity at all by some of the companies. It revealed a series of transactions purely tax avoidance motivated. Accordingly it held that the true transaction was a supply of services by the construction company to the company which occupied the property, and everything in between was disregarded.

Watch this space
Where do we go from here? The answer is ‘Watch this space’. In addition to watching how the decision in the Halifax case is followed (or not) in subsequent UK cases, we will have to wait and see whether the Halifax case, or any subsequent case decided on the same basis, ever makes it to the European Court of Justice.

It would be surprising if the European Court of Justice were to uphold the doctrine of the Halifax case. But if it did, the implications for tax minimisation and tax avoidance in Ireland would be serious. It may well be that the same principle would apply to arrangements designed to avoid or minimise tax where the tax is corporation tax, or income tax, as it does where the tax is value added tax. If that were so, tax minimisation and tax avoidance could become even more complex than it already is.

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