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VAT Voice by Steve Allen

Steve Allen, Director of VAT Solutions (UK) Ltd, comments on the significance of recent Court decisions on the issue of VAT avoidance.

Avoidance or evasion?

Over the past few years HMRC have been aggressively challenging VAT avoidance schemes and seemed to have forgotten the difference between avoidance and evasion. To remind readers, avoidance is perfectly legal and is obtained by ordering your tax affairs in such a way as to give the least tax payable. Evasion is illegal, and covers things like not declaring all your income, or using fake purchase invoices to increase VAT reclaims.

Recently, the ECJ gave 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.

Hollow victory?

HMRC won these cases, but it seems to be something of a hollow victory, as it only upheld their point on “abuse of rights” and has provided useful guidance for businesses. 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 challenge the avoidance. 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, meaning taxpayers would be no worse off than if they had never implemented the scheme.

HMRC will probably have nightmares about the Court’s comment 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 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 AG 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).

Comment

If you are intent on using a VAT avoidance scheme (our advice to clients and prospective clients has always been not to go anywhere near them), you should ensure that it has other commercial reasons, not just tax avoidance. For example, the new structure could increase sales, allow more efficient work and employment practices. As long as there is a genuine reason that can be shown to HMRC, it may now be more difficult for them to challenge things.

May 2006

Steve Allen
Director, VAT Solutions (UK) Ltd
Email: steveallen@vatsolutions-uk.com

VAT Solutions (UK) Ltd
1 Dundonald Avenue
Stockton Heath
Warrington
WA4 6JT

(T) 01925 212244
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(W) www.vatsolutions-uk.com

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: