In the long running case of HMRC v P Newey (t/a Ocean Finance) [2018] EWCA Civ 791, the Court of Appeal has decided to remit the case back to the First-tier Tribunal (FTT) for further consideration. The Court considered that the Court of Justice of the European Union (CJEU), on referral of the case after the FTT’s original decision, had adopted a new approach to the application of the Halifax principle (C-255/02).

Background

The case concerns Mr Newey’s restructuring of Ocean Finance, which sought to minimise irrecoverable VAT incurred on advertising services. Ocean Finance transferred a UK loan broking business to an entity in Jersey, which outsourced the processing operations back to the UK. The effect of this was that the supplies made by Ocean Finance were in the UK (where the recipients belonged) and therefore remained exempt. However, the advertising services were not subject to UK VAT, as the supplier of the services was in Jersey.

The issue was whether the restructuring constituted an abuse of law under the Halifax principle.

The FTT found in favour of the taxpayer. It held that the establishment of the Jersey entity was not itself abusive, because, if the scheme was genuine and not a sham, it was not contrary to the purpose of the VAT Directive. The FTT found that there were no exempt supplies in the UK.

HMRC appealed to the Upper Tribunal (UT).

Before the matter came before the UT for determination, a number of questions were referred to the CJEU on the interpretation of a “supply” for the purposes of the Directive. The CJEU provided further guidance suggesting that the contractual relationships could be redefined to reflect the economic reality of the situation. Taking into account a number of factors, in particular, Mr Newey’s financial interest and his business relationships with the other parties, the CJEU suggested ‘it is conceivable that’ the effective use and enjoyment of the advertising services was in the UK. This was for the national court to decide, following an analysis of all the relevant circumstances of the case.

The UT, taking account of the CJEU’s guidance, dismissed HMRC’s appeal. The UT reviewed the FTT’s findings and held that its conclusion that there were no exempt supplies was a conclusion that had been open to it and did not result from any error of law. The scheme, which had commercial features, was not ‘wholly artificial’ and therefore was not abusive.

HMRC appealed to the Court of Appeal on the basis that the UT did not identify an error of law and it was therefore not open to the UT to consider whether the FTT had been entitled to reach the conclusion it did (section 12, Tribunals, Courts and Enforcement Act 2007).

Court of Appeal judgment

The Court decided to remit the case to the FTT.

The Court concluded that the decisions of both the FTT and the UT were based on material errors of law. In particular, the FTT had lost sight of the fact that the Jersey entity was providing loan broking services in the UK. This was incorrect because the place of supply of the loan-broking services supplied to the lenders was the UK, by virtue of article 16 of the VAT (Place of Supply of Services) Order SI 1992/3121. It was noted that the UT had not considered this error material to the FTT’s conclusion, but the Court disagreed. In the Court’s view, it infected the FTT’s whole consideration of the abuse issue. 

In addition, and in light of the CJEU’s guidance, the Court considered that the critical question of whether the insertion of the Jersey company was “artificial” had not been assessed following receipt of the CJEU’s guidance.

In the Court’s view, the CJEU’s judgment means that arrangements do not necessarily need to be “wholly artificial”. The question is whether the arrangements are “artificial” having taken into account the business relationships actually entered into between the parties and the continued role of Mr Newey in those arrangements, and whether they reflect the underlying commercial reality.

The Court referred to the CJEU’s comments that it was “conceivable” that the advertising services were received in the UK. Whilst the Court thought this indicated a low likelihood, it acknowledged that the actual relationships had to be assessed in light of relevant factors such as whether the supplier is under another’s overall control; has the necessary knowledge and expertise; bears commercial risk; and performs the decisive elements of the service, or subcontracts them. The Court concluded that no such evaluation had been carried out and did not feel able to undertake such an evaluation itself and remake the decision. As the FTT had already heard the witnesses, the FTT was the correct body to perform that task and it therefore remitted the case to the FTT for determination.

Comment

This case is an important case on the scope of the abuse of rights principle in VAT cases. In the Court’s view, the CJEU’s judgment has changed the way the Halifax principle should be applied and it will be interesting to see how the FTT applies this new approach.

A copy of the judgment is available to view here.