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VAT abuse - where to now? Back  
Terry O’Neill considers how UK cases concerning VAT abuse are evolving following the principles laid down in the landmark Halifax decision.
Two recent UK cases have shed some interesting light on the scope of the principle of abuse in the context of VAT, following the European Court of Justice (‘ECJ’) decision in Halifax which considered the issue of abusive VAT planning. That case confirmed that European law cannot be relied upon for abusive purposes in the area of VAT. However it also enshrined into European law the entitlement of taxpayers to arrange their affairs in a VAT-efficient manner.

While UK court decisions are not directly applicable here, an Irish court is likely to consider them as being of informative value particularly when they are analysing a principle laid down by the ECJ.

WHA case
The first UK case, WHA, was heard in the Court of Appeal and is the first UK higher Court decision since the ECJ decision. The Court found for the authorities and held that an offshore insurance arrangement involving companies in Gibraltar was abusive if the tests set down in Halifax are followed. The arrangement removed VAT as a cost from the repair of cars covered by breakdown insurance supplied by a UK insurer to UK end consumers. It was found that it frustrated the purpose of the Directive, which was that supplies of insurance within the EU should be exempt and related VAT should be a cost. The Court found the transactions in Gibraltar to have no commercial purpose but to have the essential aim of obtaining a tax advantage (recovery of the VAT incurred on the repair costs) that was contrary to the purpose of the Directive.

What is interesting about this case is that the arrangements had previously been found by the Court of Appeal to be technically robust. Therefore abuse was the last weapon the UK authorities had to defeat the planning. The Court dismissed arguments by WHA that it was entitled to structure its arrangements in the most VAT efficient manner and that the Cadbury Schweppes case on freedom of establishment meant it should not be penalised for setting up companies in Gibraltar. The Court held that there was a difference between VAT efficient and abusive and the decision in Cadbury Schweppes was not permission to abuse the principles of VAT law. This arrangement relied on UK domestic law to succeed but the Court found that it could still be abusive because the UK law in question was implementing EU legislation. Finally the Court declined to redefine the abusive transactions, concluding that it was sufficient that the abuse had been frustrated by the UK tax authorities’ refusal to refund the VAT on the repair costs.

So it would seem that this case has extended the scope of abuse to some extent by ignoring the need to redefine the transactions and accepting that a structure reliant on domestic law can still be abusive.

‘GmBH’ case
Scarcely was the ink dry on the WHA judgment than the Scottish VAT Tribunal released its decision in RBS Deutschland Holdings GmBH (‘GmBH’), which found in the taxpayer’s favour. The UK tax authorities expressed the view that had the Tribunal seen the WHA decision before reaching its conclusion, the outcome might have been different. However we do not agree with that view.

GmBH was a case about VAT lacunae (differences in the VAT rules between Member States that lead to distortive and irrational results such as double or non taxation). The company used different rules on car leasing in the UK and Germany to avoid having to account for VAT on its car rental income. HMRC tried to disallow its claim for UK VAT on the purchase of the cars that were the subject of the rental agreements, arguing that the rental income was analogous to exempt as a result of the lacuna, or alternatively that the structure was abusive. The Tribunal rejected both arguments. The leasing supplies remained taxable even though no VAT was due or accounted for on them. And although the lacuna could be seen as frustrating the purpose of the Directive (which is that car leasing used and enjoyed within the EU should bear VAT), the Tribunal was clear that the remedy for this was not to say the structure was abusive and to disallow input tax, but for one of the Member States to amend its legislation so that the opportunity to save VAT was removed. Taking advantage of a difference in law between Member States to save VAT is therefore not inherently abusive.

There were no artificial steps or transactions in the GmBH structure and the lessor and lessee were unconnected. The leases were commercial and on an arms length basis. So WHA can be distinguished from GmBH as in WHA, the parties were connected and the Court concluded that certain transactions within the structure were inserted purely to save VAT and had no real commercial purpose.

So where does this leave us?
As we have always said neither Halifax nor the cases that have followed it mean VAT planning is dead. Even though WHA may have extended the scope of the abuse argument, if there is a valid and strong commercial reason for the arrangements implemented, (as was the case in GmBH), then a challenge by tax authorities that the arrangements are abusive can be resisted even if the arrangements also save VAT.

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