In HMRC v Paul Newey t/a Ocean Finance [2015] UKUT 0300, the Upper Tribunal has concluded that the offshore transfer of a business to avoid incurring irrecoverable VAT was not abusive in the sense set out by the ECJ in Halifax (Case C-255/02).


Mr Newey was a loan broker established in the UK who sold in the UK market. The dispute concerned a change in Mr Newey’s business structure. He transferred his business to a company resident in Jersey, Alabaster, which outsourced the processing operations back to the UK, in order to mitigate the VAT costs of advertising in the UK. HMRC challenged the business structure on two grounds. Firstly, that it was abusive under the Halifax principle and secondly, that the supplies were not made to the entity in Jersey at all but to Mr Newey in the UK.

The First-tier Tribunal allowed Mr Newey’s appeal. HMRC appealed this decision to the Upper Tribunal.

Upper Tribunal’s decision

HMRC’s appeal was dismissed. The Upper Tribunal agreed with the First-tier Tribunal that abuse could not be established in this case.

In reaching this conclusion, the Upper Tribunal considered that although the essential aim of the structure was to create a tax advantage, this was only half of the Halifax abuse test. It was implicit from the ECJ’s decision that it was only permissible to depart from and redefine the contractual terms if the arrangements were deemed to be wholly artificial and did not reflect economic and commercial reality.

To determine ‘economic reality’ the Upper Tribunal assessed the contractual position based on the findings of fact established by the First-tier Tribunal. It did accept the force of some of HMRC’s criticisms of the contractual arrangements, for example, the lack of knowledge and experience of the directors of the offshore entity, which could suggest that the entity concerned was not genuinely engaged in commercial activities. However, this was not held to be sufficient to cast doubt on the First-tier Tribunal’s findings in this case. Alabaster had contracted with a third party advertising agency, it paid its own bills and had genuine business relationship. It had also had some involvement in the final decision regarding whether the loan applications could proceed and was not just a brass plate office, rubber-stamping decisions taken in the UK. On this basis it was determined the structure was not artificial. The contracts were genuine.

Significantly, agreeing with the First-tier Tribunal, the Upper Tribunal held that the fact 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 is perfectly acceptable for taxpayers to structure their affairs (as in this case) so as to limit their tax liability. Structures must be viewed on their own merits, without comparing them to pre-existing or other structures that might have applied in the past. The question was not whether the change in structure resulted in a tax advantage as compared with the pre-existing structure. Only if the structure is considered artificial, is it necessary to consider the second limb of Halifax, the principle of abuse.

Furthermore, in assessing whether the essential aim of a structure gives rise to an abusive practice (the second limb of the Halifax test), the Upper Tribunal confirmed that the test is objective. HMRC’s appeal was dismissed.


This is the first of two decisions this month which consider the doctrine of abuse established in Halifax (see also our commentary below on Pendragon). In dismissing the appeal, the Upper Tribunal provides some helpful guidance on the approach to be taken when considering the Halifax principle, particularly in relation to economic reality.

The Upper Tribunal confirmed that the first limb of the Halifax test requires an analysis of the contractual terms and economic reality of the transactions under consideration. Only if the structure is considered wholly artificial is it necessary to consider the second limb of the Halifax test, the principle of abuse.

In assessing ‘economic reality’, the Upper Tribunal concluded that a transaction should be judged objectively by reference to the context and not the reason for the change from an existing structure. The Upper Tribunal commented that a distinction should be drawn between the aims of a structure and nature of the transactions. A decision taken wholly for tax purposes will not necessarily be fatal to the characterisation of a structure provided the transactions are genuine. Unfortunately, no further guidance was provided on the factors to be taken into account in determining the ‘economic reality’.

The judgment can be read here.