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Saturday, 13th April 2024
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Landmark European Court opinion on VAT planning Back  
The ECJ, in a preliminary opinion which has yet to be confirmed by the Court, has confirmed the right of taxpayers in Europe to enter into legitimate tax planning arrangements in the context of VAT. It has however confirmed that this right is subject to the general principle that these rights must not be abused. Pending the final decision of the Court, there must now be uncertainty regarding the legality of the general anti-avoidance rule contained in Irish law in so far as it applies to VAT and other taxes governed by European law.
The question of tax reliefs and tax avoidance has been the subject of much debate in recent months. One element of that debate is the extent to which Revenue authorities should be allowed to treat legitimate tax planning as unacceptable abuse of the tax system. The European Court of Justice has handed down its preliminary opinion in relation to the legality of VAT planning arrangements entered into by taxpayers in the UK.
Niall Campbell



In an eagerly awaited opinion, the European Court has confirmed EU taxpayers rights to organise their affairs in the most VAT efficient, legal manner possible although it has warned that this is subject to taxpayers not abusing this right. From an Irish perspective, one effect of the opinion is to cast doubt on the application of the general anti-avoidance rule contained in Irish law insofar as it might be applied to any EU harmonised tax such as VAT, Capital Duty or Insurance Premium Tax.

The Court was considering the legality of 3 separate VAT arrangements entered into in the UK by Halifax plc, BUPA and the University of Huddersfield. The UK tax authorities had challenged these arrangements, arguing that they should be entitled to withdraw the VAT advantages gained. The UK tax authorities claimed that transactions entered into solely for tax avoidance purposes lay outside the scope of VAT and that accordingly they did not give rise to an entitlement to recover VAT incurred on costs.

Halifax and Huddersfield were principally suppliers of exempt services but had structured some transactions so as to effectively recover VAT on associated costs. BUPA had used an advance payment arrangement to seek to remain within a zero rated regime after it had been terminated in favour of VAT exemption.

In a complex preliminary opinion, the European Court has clearly ruled against the principle that tax authorities may challenge VAT efficient arrangements purely because they confer a tax advantage on the taxpayer. The Court has upheld the principle that taxpayers do not have to organise their affairs in a manner which generates maximum tax for the local Exchequer. This represents a significant statement from the European Court and is a welcome development which should help to return some balance to the debate regarding the use of legitimate tax reliefs.

While clearly establishing the right of taxpayers to organise their affairs as they see fit provided it is within the law, the Court has indicated that taxpayers must not abuse those rights. Where they do, the tax authorities will be entitled to withdraw the VAT advantage gained. The Court has set a high threshold for what it considers to be abusive VAT arrangements and said that this can not be left to the discretion of the local tax authorities.

Firstly, to be considered abusive, the transactions must have no other economic purpose. Secondly, the advantage obtained by the taxpayer must be clearly in conflict with the intended effect of the legal provisions being relied upon.

Interestingly, the Court did not decide on whether the arrangements entered into by Halifax, BUPA and University of Huddersfield would be considered abusive or not but indicated that this will be a matter for local Courts to decide. It emphasised that the intention of the taxpayer was irrelevant to the matter of whether abuse had occurred. That was judged solely by reference to the objective facts of the transactions entered into and the consequences in terms of VAT of those transactions , contrasted with the purpose of relevant VAT provisions. The opinion clearly assumes that every VAT provision has a single clearly ascertainable purpose!

Although the opinion states the doctrine of abuse of law is an approach to the construction or interpretation of a statute it does not endorse full blooded “purposive interpretation” along the lines which the UK House of Lords have recently adopted in tax matters. The purposive interpretation in VAT matters is confined to situations where there is no purpose to an arrangement other than the obtaining of a VAT result which is inconsistent with the purpose of the relevant VAT provision.

It is expected that the final decision will be issued by the European Court within the next 6 months. While preliminary opinions can be over-turned, they are normally a good guide to the way the Court will ultimately go.

Taxpayers, tax practitioners and Revenue authorities throughout Europe will therefore have to wait another few months before receiving clarity as to the final position of the European Court. Even then, if the preliminary opinion is any indication, it should not be assumed that there will be unanimous agreement as to what the final decision means and it is likely that the question as to where legitimate tax planning finishes and abuse of the tax system starts will be argued for some time to come.

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