The Upper Tribunal has recently held in HMRC v Paul Newey t/a Ocean Finance (Ocean Finance) that a structure designed to avoid otherwise irrecoverable VAT on the cost of advertising exempt loan broking services is not an abuse in the sense set out by the Court of Justice of the European Union (CJEU) in the well-known case of Halifax.
Those engaged in wholly or largely VAT exempt activities suffer irrecoverable VAT on the costs of bought in services such as advertising. Individual businesses or sectors may therefore need to consider the most VAT efficient structure to use.
In this case, a loan broker selling in the UK market changed the business to utilise a Jersey structure in order to mitigate the VAT costs of advertising in the UK.
The decision of the Upper Tribunal makes it clear that taxpayers are able to take advantage of VAT efficient structures so long as there is genuine substance and reality to the arrangements. The Judge held that it did not matter that the new structure was more VAT advantageous than the old business model. The new structure had to be considered on its own merits, not by reference to the old structure.
This has been long running litigation which has included favourable findings of fact by the First-tier Tribunal and a subsequent reference to the CJEU to determine the weight to be given to the contractual analysis between the parties in circumstances where a VAT advantage is obtained. The CJEU held that although the contractual terms are a factor, they are not decisive for the purposes of identifying the supplier and recipient of a VAT supply. The CJEU said that the contract may be disregarded if they do not reflect “economic and commercial reality, but constitute a wholly artificial arrangement which does not reflect economic reality and was set up with the sole aim of obtaining a tax advantage.”
As always the CJEU then left if to the national court to determine whether this test applied to the facts in Ocean Finance.
The Judge in the Upper Tribunal made it clear that the CJEU was well aware that the contracts in this case were not shams, that money flowed and that the Jersey entity was not simply “rubber-stamping everything put before it”.
The Judge held that the CJEU’s decision did not add anything new to the pre-existing jurisprudence on the so called Halifax doctrine on abuse of rights. However, he held that focus of the CJEU in Ocean Finance is on the “reality” of the arrangements rather than the accrual of a tax advantage which could be contrary to the purpose of the VAT Directive.
This is an important decision which helps us better understand how the doctrine of abuse can be applied in practice. It may be that HMRC seek to appeal this decision, but in the meantime it reinforces the point that structuring a business to create tax efficiencies is acceptable so long as the reality of the transactions corresponds to the intended VAT result.