In Pendragon, the Court of Appeal held that a financing scheme structured to be VAT efficient was not abusive under the Halifax principle. In PPG Holdings, the CJEU held that an employer was entitled to deduct VAT on supplies in connection with the management and operation of its pension fund. In GSTS Pathology, the High Court granted interim relief to the taxpayer, preventing HMRC from implementing the reversal of a ruling until three months after determination of an FTT appeal. The Council has adopted two new directives aimed at tackling VAT fraud, facilitating rapid reaction and a temporary reverse charge mechanism
The key developments in VAT that matter are as follows.
In Pendragon [2013] EWCA Civ 868, the Court of Appeal held, reversing the decision of the Upper Tribunal (UT), that a financing scheme structured to be VAT efficient was not abusive under the Halifax principle. Under the VAT (Cars) Order, SI 1992/3222, dealers in second hand cars are subject to special arrangements under which, broadly, they may charge VAT only on their profit margin rather than on the full sale price of the cars.
The Pendragon group was a dealer in new and used cars. Pendragon, seeking to benefit from these provisions, implemented a scheme whereby it purchased new cars from the manufacturer, leased them intra-group as hire purchases and assigned the interest to an offshore bank as security for a £20m loan facility, before buying back the interests as a transfer of a going concern (TOGC) and selling the cars to final consumers, only charging VAT on the profit margin under the 1992 Order. The tax advantage under the scheme was around £3m, in respect of assets worth £20m. HMRC challenged the use of the scheme as an abuse of law under the Halifax principle.
The Court of Appeal held that the First-tier Tribunal (FTT) had not erred in law in concluding that the transactions were not abusive, and the UT was therefore wrong to hold that the FTT had so erred. The court focused on whether the essential aim of the transactions was to obtain a tax advantage (the second limb of the Halifax test), and confirmed that this had to be considered objectively and not by reference to the actual intentions of the parties. The court accepted that whether any of the transactions were artificial was relevant to this enquiry, but held that the use of the leasing arrangements was not artificial based on the FTT’s findings of fact, and that the use of a foreign company to carry out a transaction, resulting in a tax advantage, does not itself engage the Halifax principle following RBS Deutschland (C-277/09).
Why it matters: Pendragon demonstrates that there is a high threshold for the abuse test; it is not abusive for a taxpayer to enter into commercial arrangements that are tax efficient. Arrangements will only be abusive if there are elements of the arrangements which are necessary to achieve the tax advantage, but are otherwise artificial and devoid of an independent commercial rationale. The case also shows the difficulty of challenging the findings of the FTT based on an evaluation of the facts; the court acknowledged that the taxpayer may have lost the case if the members of the UT had been sitting in the FTT.
R (On the application of GSTS Pathology LLP) v HMRC [2013] EWHC 1823 (Admin) concerned an application for judicial review by a joint venture in which an NHS trust was a participant.
In 2008, Guy’s and St Thomas’ NHS Trust sought a ruling from HMRC in relation to the VAT treatment of pathology services to be provided to Guy’s by a new PPP joint venture (GSTS) which it established with a third party. HMRC ruled that the proposed services did not represent the ‘provision of medical care’ and were not, therefore, exempt under VATA Sch 9 Group 7. The position was subsequently reaffirmed by HMRC in 2010. The ruling was important for the purposes of GSTS’s business, as the efficiency of the proposed structure depended on the recoverability of input VAT. In January 2013, however, HMRC reversed its ruling, even though there had been no change in law or other objective change in circumstances. GSTS appealed and issued a judicial review claim applying for interim relief.
The High Court granted the relief, concluding that:
This case is exceptional in that GSTS was effectively requesting an irreversible benefit – to be taxed in accordance with its previous rulings in the period between January 2013 and the outcome of its appeal, even if HMRC won the appeal. The factors which persuaded the High Court to grant this relief included: the extent of the reliance by GSTS (which was made clear to HMRC when the rulings were sought); the fact that the rulings were and remained consistent with HMRC guidance and that there had been no change in law or judicial interpretation; and the costly and irreparable effects of restructuring the joint venture (which might be unnecessary, depending on the outcome of the FTT appeal).
Why it matters: This case appears to be the first time that a court has granted interim relief in respect of future tax liabilities. The effect is that, where a taxpayer relies on a ruling and HMRC reverses that ruling, in circumstances where the legal position is unclear and there has been no objective change in circumstances, the taxpayer may be able to maintain the status quo pending determination of an appeal. It should, however, be noted that the facts of GSTS Pathology were very strongly in the taxpayer’s favour.
The CJEU has given judgment in PPG Holdings BV (C-26/12) on whether an employer is entitled to deduct input VAT charged on supplies in connection with the management and operation of a pension fund, where such supplies are contracted and paid for by the employer.
PPG had argued that it should be entitled to a deduction on the basis that it was legally required to make pension provision for its employees, without whom it could not carry on business or make taxable output transactions, so that the costs of so doing were necessarily cost components of the price of the goods it supplied. The CJEU agreed, holding that PPG could deduct the VAT insofar as the costs of the services it acquired formed part of its general costs which were components of the price of the goods and services it supplied (which was for the referring court to determine), which would therefore have a direct and immediate link with its economic activity as a whole. Any other result would disrupt the neutrality of the VAT system.
The CJEU departed from the view of the advocate general in the case, who had opined that PPG could not deduct the input VAT, given the legal and fiscal separation of PPG and the pension fund, and the fact that the services were acquired for the fund’s purposes of obtaining income from its investments and were thus directly and immediately linked to the fund’s activity, and only indirectly and ultimately to that of PPG.
Why it matters: The case is effectively an endorsement of the Redrow principle, in that PPG was able to deduct VAT incurred for the purposes of its business, even though the immediate recipient of the supply appeared to be the pension fund.
It remains to be seen how HMRC will respond to this judgment, as it does not appear consistent with HMRC’s current policy on the attribution of costs between employers and pension funds, as set out in Notice 700/17 Funded pension schemes.
However, in the UK, pension schemes were optional until recently and services are normally contracted and paid for by the pension fund itself rather than the sponsoring employer. It is not, therefore, clear how this judgment will translate across into the UK pension environment and whether it will necessarily mean that UK employers can recover a greater proportion of the VAT costs in relation to their pension schemes.
The Council of the EU has adopted two directives to enable member states to better combat VAT fraud. The new measures will enable member states to:
The quick reaction mechanism will provide an accelerated procedure for member states to implement the reverse charge on certain supplies, by notifying the Commission and providing it with information including: the type and features of the fraud; the existence of imperative grounds of urgency; the sudden and massive character of the fraud; and its consequences in terms of considerable and irreparable financial losses. The Commission will have one month to appraise the notification and confirm whether it objects to the proposed special measure.
The new directives will apply until 31 December 2018.
Why it matters: These new measures respond to weaknesses in the current VAT system that leave member states exposed to fraud, particularly in cross-border transactions. The measures also aim to ensure that member states can act immediately to combat carousel fraud.
On 5 September, the AG’s opinion in FII GLO (C-362/12), a direct tax case concerning the availability of domestic remedies for breaches of EU law, which may also be relevant to restitutionary claims for VAT.
On 12 September, the CJEU judgment in Credit Lyonnais (C-388/11) on whether branch income should be taken into account for partial exemption purposes.
