Enter Your E-mail

Steve Allen of VAT Advisers Ltd highlights a selection of recent VAT case decisions..

High Court says Structure was 'Abusive' and Redefines Supplies for Halifax Principle

The Appellant company is a profit-making body running a sports club. Being profit-making, it makes standard-rated supplies to its members. The Appellant previously had a non-profit making body so that it could make exempt supplies to its members and remain competitive with local competitors. However, when the ‘commercial influence’ rules came in on 1 January 2000, the structure no longer worked, so on the advice of a tax adviser, an unconnected company was formed to take over the running of the club. The Appellant granted this newco an exempt non-exclusive turnover licence to occupy the premises, which was designed to strip out its surpluses. There were also additional small taxable charges for equipment hire and use of the club name.

The earlier Tribunal had found that the newco was not an ‘eligible body’ because it aimed to make surpluses which, but for the turnover licence agreement, would have been retained and enjoyed. However, the Tribunal also found that it was newco rather than the Appellant which was liable for VAT as the supplier. As such, the Tribunal found that this did not result in a tax advantage, and so the principle of ‘Halifax’ did not apply. Due to its subsequent liquidation, newco could not pay the assessment. HMRC appealed on the basis of Halifax, arguing that the supplies should be redefined so that the supplies by the club were made by the Appellant, thus making it liable for the VAT.

Turning to the Halifax principle, the Court considered the Tribunal’s view that no tax advantage had arisen. HMRC felt the Tribunal had been wrong to only consider the position of newco rather than the overall benefit of the scheme. The Court noted that under the new scheme, not only did the Appellant avoid VAT on the membership, it also received newco’s profit free of VAT under an exempt turnover licence agreement. The Court saw this as a tax advantage on the basis that the payment to strip out the profit created a situation  which was contrary to the purpose of the exempting provisions of the Sixth Directive. It then looked at the impact of the fact that the scheme did not work as the Appellant’s supplies were not in fact exempt. The Court concluded that the Halifax principle should not be ruled out just because an individual step did not succeed.

The Court agreed with the Tribunal that the essential aim was to implement a scheme under which the net proceeds of a business continued to accrue with the benefit of exemption from VAT. HMRC argued that any redefinition should result in treating the supplies as by the Appellant. The Tribunal also referred to an aggregation of payments between the Appellant to newco to deprive the turnover licence of its status of being connected to immovable property, and make it a standard-rated supply by the Appellant. The Court said there was no direct authority for such a redefinition, but was happy with either method, preferring the one put forward by HMRC. The Court thus found for HMRC, and allowed the appeal.

The Atrium Club Limited, High Court Chancery Division, 5 May 2010

Tribunal says VAT due on UK Acquisition WITHOUT Any Right to Corresponding Input Tax

This case concerned the Appellant’s purchase of toilet rolls from an Italian supplier. No VAT had been charged by the supplier as it had used the Appellant’s UK VAT number on the invoices. However, the goods were delivered to an address in Spain, and on discovering this fact, HMRC assessed the Appellant for the output tax on the UK acquisition. At the same time, HMRC said the Appellant was not entitled to input tax credit because there was no evidence of any corresponding taxable supplies being made.

The Tribunal first looked at whether there was an acquisition. On examining the evidence, it was satisfied that there was an acquisition on which VAT was due under VATA 1994 s 10(2). This was because the Appellant had made use of its VAT number to avoid Italian VAT. The Tribunal then turned to the issue of input tax recovery. HMRC argued the burden was on the taxpayer to show the goods were acquired for the purposes of taxable supplies. However the only evidence produced by the Appellant, was, by its own admission, fabricated. The Tribunal found that in absence of objective proof that the goods were used or to be used for making taxable supplies, there was no entitlement to input tax.

The Tribunal ignored the Appellant’s claim that HMRC were ‘cherry picking’ and not looking at the transactions as a whole. The Appellant also argued that there was no acquisition because this was in fact triangulation. However, on the same basis that there was no evidence of the onward supply, this argument was also unsuccessful.

Mexcom Limited (TC00468)

COA finds Mainly for HMRC in Denying Input Tax in MTIC Case

This MTIC case comprises three joined appeals from the High Court, two of which were by the taxpayer and the other by HMRC. 

The Court began by noting that there are over 800 live MTIC appeals, involving more than £2billion of VAT. In all these cases, HMRC refused input tax recovery on the basis that the taxable person ‘knew’ or ‘should have known’ that he was involved in transactions connected with the fraudulent evasion of VAT.

The Court had to decide whether knowledge of a risk that a transaction was more likely than not connected to fraud, was sufficient to justify a refusal of input tax.

The Court said the right to deduct VAT was fundamental to the VAT system, and any derogation or move away from this must be interpreted strictly. The earlier Optigen case (C-354/03) found that the right to deduction cannot be affected where the taxable person had no means of knowing fraud has been taking place somewhere else in the supply chain. The Kittel case then went on to say that input tax deduction could be denied ‘where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT’. On the back of Kittel, the Court found that a person who has no intention of undertaking an economic activity, but pretends to do so in order to make off with the tax he has received on his supposed supply, does not meet the objective criteria which determine the basis of the right to deduct. Equally, a taxable person who knows or should have known that the transaction he is undertaking is connected with VAT fraud, is to be regarded as a participant, and thus fails to meet the objective criteria on the right to deduct. The Judge stated ‘once the approach of the Court in Kittel is understood, centred as it is on the scope of VAT and of the right to deduct, as measured by the objective criteria, many of the objections raised by traders fall away’. As such, the Appellants’ challenges on legal certainty and human rights were dismissed.

On the meaning of ‘should have known’ is concerned, the Court found that a trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises. The Appellants had argued that the lack of taking every reasonable precaution did not mean there was an automatic participation in fraud. The Judge said ‘It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the (ECJ) principle in Kittel’.

One of the key questions is whether denial of the right to deduct is on the grounds that the trader knew or should have known that

(a) it was more likely than not that the transactions were connected to fraud, or

(b) they were connected with fraud.

The Court said it was not sufficient that there is merely a risk that a purchase is connected with fraud. However, a trader may be seen as a participant where he should have known that the only reasonable explanation for the circumstances in which his transaction took place, was that it was connected with such fraudulent evasion.

On one of the taxpayer appeals, the Court saw that there were findings of actual knowledge, and dismissed their appeal. The other taxpayer appeal concerned whether the trader should have known that it was more than likely that the purchases were connected with fraud. The Court thought the correct question was actually whether the taxpayer should have known the transactions were connected with fraud. Either way, the correct decision was reached and that appeal was also dismissed. For the HMRC appeal, the Court agreed with the High Court that the relevant knowledge which would deny input tax recovery is that the taxpayer ought to have known by its purchases that it was participating in transactions which were connected with VAT fraud; that such transactions might be so connected is not enough. HMRC’s appeal was dismissed.

Mobilx Limited (in Administration), Calltel Telecom Limited, and Blue Sphere Global Limited, Court Of Appeal, 12 May 2010