The Court of Appeal remits the case back to the FTT. Even so, does the decision embolden HMRC when challenging arrangements as a matter of abuse of law? Frankie Beetham (Squire Patton Boggs) reports.
In its judgment on 17 April 2018, the Court of Appeal (CA) has allowed the appeal of HMRC against the decision of the Upper Tribunal (UT) in an important case concerning the application of the Halifax abuse principle for VAT purposes (HMRC v Newey (t/a Ocean Finance) [2018] EWCA Civ 791).
However, rather than concluding whether the scheme in question constituted an abuse of law itself, the CA has remitted the case back to the First-tier Tribunal (FTT), which had initially heard the case in 2010.
That said, the ruling is at least a partial victory for HMRC, which has relentlessly pursued the case through the courts from the original FTT decision and via the CJEU.
Most will be familiar with the background to this case. The £10.7m dispute centres on whether a structure put in place in 1996 with the sole object of eliminating an irrecoverable VAT burden was ‘abusive’. Until 1996, Ocean Finance (OF) provided loan-broking services in the UK, and in so doing incurred large amounts of irrecoverable VAT on its receipt of advertising services.
On the recommendation of its professional tax advisers, OF restructured its operation. The main features of the restructuring involved:
Alabaster also contracted with Jersey-based advertising company Wallace Barnaby to provide it with advertising services through an agency based in the UK. The supply of advertising services was, therefore, outside the scope of UK VAT.
HMRC assessed Mr Newey for unpaid VAT of £10.7m in respect of the advertising services. Mr Newey appealed.
HMRC’s argument was that the scheme constituted an abuse of law under the Halifax, and the advertising services were supplied to Mr Newey as the real supplier of the loan broking services; the contractual position was artificial. Slightly surprisingly, at no point in the proceedings did HMRC argue Alabaster had a business establishment in the UK by virtue of carrying on business through a UK agency (i.e. Mr Newey).
The original decision of the FTT was that the tests in Halifax were not met and the supplies were made in accordance with the contracts to and from Alabaster, and not Mr Newey. The UT, considering guidance from the CJEU, upheld the FTT’s decision. The CA, however, has now held that both the FTT and the UT erred in law and has asked the FTT to try again.
The CA has held that the FTT were wrong to decide that if no exempt supplies were made in the UK, it was not possible to find an abuse; it was, therefore, possible for the relevant supplies to be treated as having been made to Mr Newey.
In addition, the CA has also suggested that, on the basis of the UT judgment, the FTT may not have properly applied the Halifax test, i.e. the FTT had not properly and separately examined the question whether the arrangements were wholly artificial transactions which did not reflect the commercial and economic reality.
In light of these findings, the CA has ruled that an evaluation of the facts (as required by the CJEU) has not yet been performed by a fact-finding body that had directed itself correctly in law. On this basis, the CA had no option but to remit the case to the FTT to perform that evaluation. The questions put to the FTT by the CA are:
The CA has also provided guidance, complementing that of the CJEU, on the proper application of Halifax. It draws heavily on the ruling in Pendragon, considered as the leading UK authority. That case clearly provides that simply choosing to obtain advertising services from a Jersey company cannot be said to be abusive because a taxpayer is entitled to structure a business in a tax-effective manner. As the CA says: ‘Mr Newey’s decision to incorporate his business in Jersey was purely tax driven, but that does not make it artificial or abusive’.
However, the court notes that the contractual position is not necessarily conclusive either. It is necessary to consider the contract along with whether the VAT legislation is intended to allow a taxpayer to implement the relevant transaction in the manner being considered. When considering artificiality of a contractual position in the context of abuse, in addition to considering whether there is a commercial purpose, it is necessary to consider the particular method and arrangements chosen to achieve such commercial purpose.
In referring this particular case back to the FTT, the CA has said that the question of artificiality must be assessed by reference to the business relationships actually entered into between Mr Newey, Alabaster, the lenders and Wallace Barnaby. The test to be met is whether those relationships reflect an underlying commercial reality. It is clear that Mr Newey’s role in the business, and his relationship with Alabaster, would be key to this. The CA appears to be giving a strong hint to the FTT that it considers this test cannot be assumed to be met.
As has been noted by each of the courts in this case, and in the advocate general opinion in Halifax, legal certainty is crucial and the operation of the doctrine of abuse should define the realm of choices that the VAT rules leave open to taxable persons. This case is a clear illustration of the vagaries of applying purposive legislation and the difficulties in trying to divine the intention of Parliament lying behind it. As calls to simplify our tax code grow louder, and the pressure grows for more purposive legislation to be introduced, the lesson in this case would appear to be that even when you think you are happily rowing with the tide, it can quickly turn against you.
A date has not yet been set for the FTT hearing. Subject to the FTT’s (new) findings, HMRC may feel greater confidence to challenge arrangements on the basis of commercial and economic reality (or lack of it) and to pursue such cases as a matter of abuse of law.
Frankie Beetham, Squire Patton Boggs (frankie.beetham@squirepb.com)
The Court of Appeal remits the case back to the FTT. Even so, does the decision embolden HMRC when challenging arrangements as a matter of abuse of law? Frankie Beetham (Squire Patton Boggs) reports.
In its judgment on 17 April 2018, the Court of Appeal (CA) has allowed the appeal of HMRC against the decision of the Upper Tribunal (UT) in an important case concerning the application of the Halifax abuse principle for VAT purposes (HMRC v Newey (t/a Ocean Finance) [2018] EWCA Civ 791).
However, rather than concluding whether the scheme in question constituted an abuse of law itself, the CA has remitted the case back to the First-tier Tribunal (FTT), which had initially heard the case in 2010.
That said, the ruling is at least a partial victory for HMRC, which has relentlessly pursued the case through the courts from the original FTT decision and via the CJEU.
Most will be familiar with the background to this case. The £10.7m dispute centres on whether a structure put in place in 1996 with the sole object of eliminating an irrecoverable VAT burden was ‘abusive’. Until 1996, Ocean Finance (OF) provided loan-broking services in the UK, and in so doing incurred large amounts of irrecoverable VAT on its receipt of advertising services.
On the recommendation of its professional tax advisers, OF restructured its operation. The main features of the restructuring involved:
Alabaster also contracted with Jersey-based advertising company Wallace Barnaby to provide it with advertising services through an agency based in the UK. The supply of advertising services was, therefore, outside the scope of UK VAT.
HMRC assessed Mr Newey for unpaid VAT of £10.7m in respect of the advertising services. Mr Newey appealed.
HMRC’s argument was that the scheme constituted an abuse of law under the Halifax, and the advertising services were supplied to Mr Newey as the real supplier of the loan broking services; the contractual position was artificial. Slightly surprisingly, at no point in the proceedings did HMRC argue Alabaster had a business establishment in the UK by virtue of carrying on business through a UK agency (i.e. Mr Newey).
The original decision of the FTT was that the tests in Halifax were not met and the supplies were made in accordance with the contracts to and from Alabaster, and not Mr Newey. The UT, considering guidance from the CJEU, upheld the FTT’s decision. The CA, however, has now held that both the FTT and the UT erred in law and has asked the FTT to try again.
The CA has held that the FTT were wrong to decide that if no exempt supplies were made in the UK, it was not possible to find an abuse; it was, therefore, possible for the relevant supplies to be treated as having been made to Mr Newey.
In addition, the CA has also suggested that, on the basis of the UT judgment, the FTT may not have properly applied the Halifax test, i.e. the FTT had not properly and separately examined the question whether the arrangements were wholly artificial transactions which did not reflect the commercial and economic reality.
In light of these findings, the CA has ruled that an evaluation of the facts (as required by the CJEU) has not yet been performed by a fact-finding body that had directed itself correctly in law. On this basis, the CA had no option but to remit the case to the FTT to perform that evaluation. The questions put to the FTT by the CA are:
The CA has also provided guidance, complementing that of the CJEU, on the proper application of Halifax. It draws heavily on the ruling in Pendragon, considered as the leading UK authority. That case clearly provides that simply choosing to obtain advertising services from a Jersey company cannot be said to be abusive because a taxpayer is entitled to structure a business in a tax-effective manner. As the CA says: ‘Mr Newey’s decision to incorporate his business in Jersey was purely tax driven, but that does not make it artificial or abusive’.
However, the court notes that the contractual position is not necessarily conclusive either. It is necessary to consider the contract along with whether the VAT legislation is intended to allow a taxpayer to implement the relevant transaction in the manner being considered. When considering artificiality of a contractual position in the context of abuse, in addition to considering whether there is a commercial purpose, it is necessary to consider the particular method and arrangements chosen to achieve such commercial purpose.
In referring this particular case back to the FTT, the CA has said that the question of artificiality must be assessed by reference to the business relationships actually entered into between Mr Newey, Alabaster, the lenders and Wallace Barnaby. The test to be met is whether those relationships reflect an underlying commercial reality. It is clear that Mr Newey’s role in the business, and his relationship with Alabaster, would be key to this. The CA appears to be giving a strong hint to the FTT that it considers this test cannot be assumed to be met.
As has been noted by each of the courts in this case, and in the advocate general opinion in Halifax, legal certainty is crucial and the operation of the doctrine of abuse should define the realm of choices that the VAT rules leave open to taxable persons. This case is a clear illustration of the vagaries of applying purposive legislation and the difficulties in trying to divine the intention of Parliament lying behind it. As calls to simplify our tax code grow louder, and the pressure grows for more purposive legislation to be introduced, the lesson in this case would appear to be that even when you think you are happily rowing with the tide, it can quickly turn against you.
A date has not yet been set for the FTT hearing. Subject to the FTT’s (new) findings, HMRC may feel greater confidence to challenge arrangements on the basis of commercial and economic reality (or lack of it) and to pursue such cases as a matter of abuse of law.
Frankie Beetham, Squire Patton Boggs (frankie.beetham@squirepb.com)
