HMRC have confirmed that they beleive the decision of the VAT and Duties Tribunal in the Weald Leasing Ltd case was incorrect. Believing that the Tribunal failed properly to understand, and thus to follow, the European Court’s guidance in the Halifax case, HMRC have accordingly appealed to the High Court.
The decision, which was released on 7 Febraury 2007, is significant for a number of reasons.
Firstly, it is the first Tribunal case in which HMRC have attempted to deploy a comprehensive Halifax argument since the European Court of Justice issued its judgment in that case.
Secondly, it considered a VAT mitigation arrangement strikingly similar to those previously widely implemented and challenged by HMRC.
Background
The Churchill VAT group was in the business of providing insurance services. Churchill Accident Repair Centre ('Accident Repair') and Churchill Management Limited ('Churchill Management') were both members of that VAT group. The overall input VAT recovery for the group was less than 1%.
To reduce the burden of the irrecoverable VAT, Churchill Management and Churchill Accident implemented an arrangement whereby Weald Leasing Limited would acquire assets needed in the Churchill Management and Churchill Accident businesses. It would do so under instruction from the Churchill finance department.
Weald Leasing ('Weald Leasing Limited') was a wholly owned subsidiary of Churchill Management but they were not members of the same VAT group. Weald Leasing funded the acquisitions using interest free loans from other members of the Churchill group.
The sole lessee of Weald Leasing was another company, Suas Limited ('Suas'). Suas was unconnected with the Churchill group but was owned by an employee of Churchill Management (the 'employee') and his wife.
Having acquired the assets, Weald Leasing would provide Suas with a description of the asset and an invoice for its purchase. Upon receipt of that information, the employee would review the list and consider which pieces of equipment were suitable for leasing. If items were deemed suitable for leasing, the employee would draw up a lease agreement. Suas would lease the equipment from Weald Leasing for typically 1/40 of the cost of the item not taking into account any interest or capital allowances. Suas would then sub-lease the asset to either Churchill Management or Accident Repair. When Suas was paid by Churchill Management or Accident Repair (as the case may be), it paid Weald Leasing.
The overall effect was as follows:
- Weald Leasing fully recovered the VAT incurred on the acquisition of the asset and accounted for output VAT on the lease rentals to Suas,
- Suas recovered the input VAT incurred on the lease payments to Weald Leasing and for output tax on the lease rentals to Churchill Management / Accident Repair, and
- Churchill Management / Accident Repair suffered the VAT as almost wholly irrecoverable. There was however, a deferral on the VAT which would have been payable has the asset been acquired directly.
HMRC assessed Weald Leasing under the Halifax doctrine and under the 'abuse of rights' doctrine.
Tribunal Decision
The Tribunal decision considered whether the taxpayer had obtained a 'tax advantage'. It found that there was nothing in EU Law which prevented an exempt trader from leasing an asset and spreading the irrecoverable VAT provided that ownership does not pass to the exempt trader on payment of the last sum due.
It was held that the fact that the Churchill VAT group obtained the use of the assets for its predominantly exempt business by leasing them as opposed to buying them (so to spread the burden of irrecoverable VAT) did not result in a tax advantage which was contrary to EU law. Further, it held that the fact that the assets were acquired by a connected company outside the VAT group did not amount to 'abuse'.
The Tribunal found that the arrangements were market practice and that the deferral hinged on the rental payments rather than the leasing arrangement themselves.
The Tribunal further considered that, under Halifax, it was entitled to examine all the transactions and not just the lease from Weald Leasing to Suas. It considered that it was entitled to examine all the steps, including the acquisition of the asset and the invoicing procedures.
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