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VAT Voice by Andrew Needham

Andrew Needham, Director of VAT Solutions (UK) Ltd, comments on three important Court decisions and their implications for VAT avoidance arrangements.

The ‘Huddersfield’ decision

The ECJ has given in its decision in the three long-awaited ‘Halifax’, ‘Huddersfield’, and ‘BUPA’ cases, which addressed the question of whether transactions carried out for tax avoidance purposes could be supplies of goods or services and an economic activity. In the Huddersfield case the ECJ took it upon itself to additionally rule that the existence of a tax avoidance motive is irrelevant to the question of whether a transaction is a supply of goods or services.

The ‘Halifax’ decision

The ECJ went further in the Halifax decision than the previous courts had done. It said that no right to input tax deduction existed where the claimant has engaged in an ‘abusive practice’, and that where an abusive practice exists, the transactions must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.

The Court added that an abusive practice can be found to exist only if, first, the transactions concerned result in the accrual of a tax advantage the grant of which would be contrary to the purpose of the Sixth VAT Directive, and, second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage (as the Advocate-General observed in his Opinion, the prohibition of abuse is not relevant where the economic activity carried out may have some reason other than the mere attainment of tax advantages). The Court also noted that whilst Halifax appeared to have sought an advantage contrary to the purpose of the Sixth Directive, the problem in this case appeared to stem in part from UK law allowing the transactions in question to have the effect being sought after. Moreover, the Court also noted that:

"Where the taxable person chooses one of two transactions, the Sixth Directive does not require him to choose the one which involves paying the highest amount of VAT. On the contrary, as the Advocate-General observed in point 85 of his Opinion, taxpayers may choose to structure their business so as to limit their tax liability."

The BUPA decision

In the BUPA case, the Court has held that in order for VAT to become chargeable in advance of a supply, for example where there is a prepayment for the supply, the details of the supply must be clearly defined at the time of the prepayment – in other words, the goods or services in question must be precisely identified.

Halifax Plc (C-255/02), University of Huddersfield (C-223/03) and BUPA Hospitals Ltd (C-419/02), 21 February2006

Comment:

Overall, this is a win for HMRC, but there are some drawbacks. First of all, it is now established that where tax avoidance is not the sole aim of the structure, it will be difficult for HMRC to take the avoidance route. Secondly, the Court was quite clear that where avoidance is established, no penalty should be applied. The structure should be merely unravelled to reflect the position beforehand, and to that extent, taxpayers will be no worse off other than the professional fees they have incurred implementing the scheme. HMRC will have nightmares about the Court’s comment that taxpayers are entitled to “structure their business so as to limit their tax liability.” The final drawback is to do with the ECJ’s unexpected ruling on pre-payments. Whilst this helped HMRC in the Huddersfield case, it may well open up a whole new can of worms (and legal cases) on the timing of tax points for things such as vouchers and mobile phone top-up cards.

March 2006

Andrew Needham
Director, VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com

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VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via their website: