The offshore transfer of a business and the Halifax principle
Our pick of this week's cases
In HMRC v Paul Newey t/a Ocean Finance [2015] UKUT 0300 (2 June 2015), the UT found that the offshore transfer of a business to avoid incurring irrecoverable VAT was not abusive.
Ocean Finance had transferred a loan broking business to Alabaster, a company resident in Jersey, which outsourced the processing operations back to the UK. Prior to the move, Ocean Finance had incurred irrecoverable VAT on advertising, as it only had made exempt supplies. The purported effect of the move was that the supplies made by Ocean Finance were made in the UK (where the recipients belonged) and therefore remained exempt. However, the advertising services were treated as not subject to UK VAT, as both the supplier of the services and Alabaster belonged in Jersey. The issue was whether the scheme was abusive under the Halifax principle.
The UT observed that a departure from the contractual position was only justified if there was an abusive practice. On that basis, it was not open to establish that the relevant supplies were made to and by Ocean Finance without the need to redefine the contractual arrangements. There would be abuse if the scheme comprised ‘wholly artificial arrangements which did not reflect economic reality’; or if ‘the contractual terms constituted a purely artificial arrangement which did not correspond with the economic and commercial reality of the transactions’, and the sole aim of the transaction was to obtain a tax advantage.
Agreeing with the FTT, the UT found that the question was whether the structure (and the transactions within it) gave rise to abusive practice in the context of the overall factual matrix. The question was not whether the change in structure resulted in a tax advantage, as compared with the pre-existing structure. Furthermore, the fact that a change of structure was wholly tax driven did not mean that the resulting structure, had it been set up initially, would have given rise to an abusive practice. It was perfectly acceptable for a Jersey resident company to outsource its processing operation to a UK resident company.
Why it matters: The UT accepted that there was no commercial justification for Ocean Finance to cease to carry on business as a loan broker and that the structure would not have been put in place apart from the tax advantages. However, this was only relevant to the second limb of the Halifax test (what was the sole aim of the arrangements); and not to the question of whether those arrangements were wholly artificial and did not reflect the economic and commercial reality of the transaction.
The offshore transfer of a business and the Halifax principle
Our pick of this week's cases
In HMRC v Paul Newey t/a Ocean Finance [2015] UKUT 0300 (2 June 2015), the UT found that the offshore transfer of a business to avoid incurring irrecoverable VAT was not abusive.
Ocean Finance had transferred a loan broking business to Alabaster, a company resident in Jersey, which outsourced the processing operations back to the UK. Prior to the move, Ocean Finance had incurred irrecoverable VAT on advertising, as it only had made exempt supplies. The purported effect of the move was that the supplies made by Ocean Finance were made in the UK (where the recipients belonged) and therefore remained exempt. However, the advertising services were treated as not subject to UK VAT, as both the supplier of the services and Alabaster belonged in Jersey. The issue was whether the scheme was abusive under the Halifax principle.
The UT observed that a departure from the contractual position was only justified if there was an abusive practice. On that basis, it was not open to establish that the relevant supplies were made to and by Ocean Finance without the need to redefine the contractual arrangements. There would be abuse if the scheme comprised ‘wholly artificial arrangements which did not reflect economic reality’; or if ‘the contractual terms constituted a purely artificial arrangement which did not correspond with the economic and commercial reality of the transactions’, and the sole aim of the transaction was to obtain a tax advantage.
Agreeing with the FTT, the UT found that the question was whether the structure (and the transactions within it) gave rise to abusive practice in the context of the overall factual matrix. The question was not whether the change in structure resulted in a tax advantage, as compared with the pre-existing structure. Furthermore, the fact that a change of structure was wholly tax driven did not mean that the resulting structure, had it been set up initially, would have given rise to an abusive practice. It was perfectly acceptable for a Jersey resident company to outsource its processing operation to a UK resident company.
Why it matters: The UT accepted that there was no commercial justification for Ocean Finance to cease to carry on business as a loan broker and that the structure would not have been put in place apart from the tax advantages. However, this was only relevant to the second limb of the Halifax test (what was the sole aim of the arrangements); and not to the question of whether those arrangements were wholly artificial and did not reflect the economic and commercial reality of the transaction.
