de voil indirect tax intelligence issue...

De Voil Indirect Tax

IntelligenceSEPTEMBER 2013ISSUE 208

NEWS IN BRIEFGovernment Publications 2European Commission 7Tribunals 8Court of Justice of the European Union 12

EDITORIALPension fund costs 12

CASES AND COMMENTMercedes-Benz Financial Services UK Limited 14Fiscale Eenheid PPG Holdings 15

CONTEXT IS EVERYTHING!The CJEU interpretation of VAT law 16

HERE COMES THE SUNSolar panel dumping dispute 19

CUSTOMSHalifax explained 24

Letterpart Ltd • Typeset in XML • Division: DVITI_208 • Sequential 1

Letterpart Ltd • Size: 240mm x 162mm • Date: September 6, 2013 • Time: 12:59



NEWS IN BRIEF

Government Publications

Revenue & Customs Brief 25/2013VAT: Insolvency services – furtherclarification of Tribunal rulingin Paymex

HMRC have issued RCB 25/13 dated2 September 2013. It gives further clarifi-cation of their position on the VAT treat-ment of supervisors’ fees in voluntaryarrangements, in circumstances where theconditions for exemption as set out in thePaymex decision are not met. The briefalso confirms that the same conditions forthe exemption apply to trust deeds.

The text of the Brief is set out in fullbelow.

“HMRC Revenue & Customs (HMRC)Brief 17/13 (www.hmrc.gov.uk/briefs/vat/brief1713.htm) published on 8 July2013 further clarified the VAT treatmentof supervisors’ fees in light of the Paymexjudgment, following on from Brief 27/11(www.hmrc.gov.uk/briefs/vat/brief2711.htm) published on 19 July 2011 and Brief35/11 (www.hmrc.gov.uk/briefs/vat/brief3511.htm) published on 20 Septem-ber 2011.

In issuing Brief 17/13, HMRC did nomore than re-state the existing legal posi-tion which was unaffected by the Paymexjudgment. When handling any repaymentsof VAT HMRC takes into account allrelevant circumstances of the case includ-ing published guidance before verifyingthe repayment as being appropriate.

The provisions of Brief 17/13 also applyto trust deeds in that the same firm oftrustees must conduct the trust deed fromthe trustee’s appointment through to itsconclusion in order for the supply toconstitute a single exempt supply for VATpurposes.

Issued 2 September 2013”

Revenue & Customs Brief 19/2013:Senior Accounting Officerguidance updates

HMRC have issued RCB 19/13 dated6 August 2013. It concerns a number ofupdates to the Senior Accounting Officer(SAO) guidance, which HMRC regard aspolicy clarifications, rather than changes.These include: the responsibilities ofcompanies whose shares are held by aparent on trading account (such as banksor private equity groups) to comply withtheir SAO obligations; use of correct SAOcertificates; and duties of the SAO of therepresentative member of a VAT group,which HMRC acknowledges was notcovered explicitly in previous guidance.

The text of the Brief is set out in fullbelow.

“1. Introduction

This Revenue & Customs Brief drawsattention to:

(1) HM Revenue and Customs’(HMRC’s) view on companies fallingwithin the Senior Accounting Officer(SAO) rules which meet the qualifyingcriteria and whose shares are held by aparent on trading account (commonly asituation involving banks or private equity(PE) groups).(2) Recent updates to HMRC’s SAOGuidance (SAOG):

(a) the form of certificate that an SAOmust provide to HMRC as prescribedin the SAOG (SAOG15200www.hmrc.gov.uk/manuals/saogmanual/SAOG15200.htm onwards)(b) other recent updates to the SAOG,including:• clarification of HMRC’s interpreta-tion of the ’turnover test’(SAOG11232www.hmrc.gov.uk/manuals/saogmanual/SAOG11232.htm)• provision of an example of balancesheet aggregation (SAOG11285www.hmrc.gov.uk/manuals/saogmanual/saog11285.htm)

2 DE VOIL INDIRECT TAX INTELLIGENCE SEPTEMBER 2013





• clarification of HMRC’s view onthe operation of the SAO rules whena qualifying company fails to identifyits SAO (SAOG12100www.hmrc.gov.uk/manuals/saogmanual/SAOG12100.htm; 12200www.hmrc.gov.uk/manuals/saogmanual/saog12200.htm; 16300www.hmrc.gov.uk/manuals/saogmanual/SAOG16300.htm; 16400www.hmrc.gov.uk/manuals/saogmanual/SAOG16400.htm; 16500www.hmrc.gov.uk/manuals/saogmanual/SAOG16500.htm)• slightly revised wording inSAOG14330 (www.hmrc.gov.uk/manuals/saogmanual/SAOG14330.htm); 14352 (www.hmrc.gov.uk/manuals/saogmanual/SAOG14352.htm) and 14353 (www.hmrc.gov.uk/manuals/saogmanual/SAOG14353.htm) to improve consistency oflanguage with the SAO legislation• clarification that the concept of ’inall material respects’ should be consid-ered in relation to a company and nota group (SAOG14330www.hmrc.gov.uk/manuals/saogmanual/SAOG14330.htm)• clarification of HMRC’s view onthe responsibilities of an incomingSAO in relation to the period coveredby their predecessor(SAOG15200www.hmrc.gov.uk/manuals/saogmanual/SAOG15200.htm)• clarification of HMRC’s applicationof the SAO penalty provisions ingroup situations (SAO18300www.hmrc.gov.uk/manuals/saogmanual/SAOG18300.htm, 18400www.hmrc.gov.uk/manuals/saogmanual/SAOG18400.htm, 18500www.hmrc.gov.uk/manuals/saogmanual/SAOG18500.htm and 18600www.hmrc.gov.uk/manuals/saogmanual/SAOG18600.htm)• clarification of HMRC’s view thatthe SAO for the representative com-pany in a VAT group must carry outhis or her SAO duties in relation tothe group’s VAT liabilities(SAOG14335www.hmrc.gov.uk/

manuals/saogmanual/SAOG14335.htm; 14460www.hmrc.gov.uk/manuals/saogmanual/SAOG14600.htm; 15100www.hmrc.gov.uk/manuals/saogmanual/SAOG15100.htm; 16710www.hmrc.gov.uk/manuals/saogmanual/SAOG16710.htm; 18400www.hmrc.gov.uk/manuals/saogmanual/SAOG18400.htm and 18600www.hmrc.gov.uk/manuals/saogmanual/SAOG18600.htm)• revised wording to reflect recentorganisational changes in HMRC(SAOG13100www.hmrc.gov.uk/manuals/saogmanual/SAOG13100.htm; 13400www.hmrc.gov.uk/manuals/saogmanual/SAOG13400.htm; 16100www.hmrc.gov.uk/manuals/saogmanual/SAOG16100.htm; 16300www.hmrc.gov.uk/manuals/saogmanual/SAOG16300.htm; 16500www.hmrc.gov.uk/manuals/saogmanual/SAOG16500.htm; 16600www.hmrc.gov.uk/manuals/saogmanual/SAOG16600.htm; 16700www.hmrc.gov.uk/manuals/saogmanual/SAOG16700.htm; 16900www.hmrc.gov.uk/manuals/saogmanual/SAOG16900.htm)• revised wording and updated guid-ance regarding penalty assessments,appeals, reasonable excuse and post-ponements (SAOG20100www.hmrc.gov.uk/manuals/saogmanual/SAOG20100.htm and 22450www.hmrc.gov.uk/manuals/saogmanual/SAOG22450.htm)

These updates do not represent changes inpolicy – they are intended to clarifyHMRC’s interpretation of the SAO rules.However, the updates regarding HMRC’sview on the duties of an SAO for therepresentative company of a VAT groupprovide clarification regarding an issue notpreviously explicitly addressed by theSAOG.

2. Who needs to read this?

Companies and SAOs falling within theSAO rules and their agents. Further detailis given below.

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3. Shares held on trading accountand the SAO rules

A UK company will fall within the SAOrules if it is a 51% subsidiary of anothercompany, provided that it meets all theSAO qualifying criteria, even if its sharesare held on trading account. This situationwill commonly arise where a bank orprivate equity (PE) group holds shares ontrading account.

It is a question of fact who the SAO for acompany is. The SAO of a company,whose shares are held on trading accountby another, may be an officer of thecompany which holds the shares; anofficer of the company whose shares areheld or even an officer of another com-pany within the group.

Where such a company comes within theSAO rules for the first time, for exampleas a result of a ‘debt for equity’ swap, it ispossible that its SAO and other officersmay not be immediately aware of theirobligations under this legislation. It maybe possible – depending on the facts ofeach case – that a company whose sharesare held on account by another and itsSAO have a ‘reasonable excuse’ in the firstinstance for not complying with theirrespective SAO-related obligations, pro-vided these failures are put right withoutdelay once they became aware of theirobligations.

HMRC expects that where this situationarises, companies holding the shares ofother companies on trading account willhave appropriate systems and governancein place to be able to identify those othercompanies, and will ensure that HMRCand those companies are advised of theposition and their SAO obligations. How-ever, the legal responsibility to notify thename of the SAO lies with the qualifyingcompany itself, not with the owner of itsshares.

If a company falling within the SAO rulesdoes not have a HMRC Customer Rela-tionship Manager (CRM), and has notcome to HMRC’s attention for SAO

purposes, the company should contactHMRC to discuss being allocated aCRM.

4. The form of SAO certificates

SAOs are required to provide the Com-missioners of HMRC with a certificatefor each financial year of the company.The certificate must state whether thecompany had appropriate tax accountingarrangements throughout the financialyear and, if it did not, give an explanation.

This certificate must be provided by suchmeans and in such form as is reasonablyspecified by HMRC.

When the SAOG was revised in April2012, HMRC updated its guidance inrespect of the specified form that an SAOcertificate must take, and provideddetailed specimen examples(SAOG15200www.hmrc.gov.uk/manuals/saogmanual/SAOG15200.htmonwards). However, HMRC has contin-ued to see examples of certificates whichdo not state unambiguously whether thetax accounting arrangements were appro-priate or not.

It is the SAO’s responsibility to make aconsidered judgement, in the light of allof the information available to him or her,to determine whether or not the com-pany had appropriate tax accountingarrangements for the year. Therefore, thecertificate specifications in the SAOG areintended to provide a clear and categoricalform of wording to enable SAOs to fulfilltheir obligation. Any alternative form isunlikely to meet HMRC’s requirements.

To this effect, the guidance atSAOG15200 (www.hmrc.gov.uk/manuals/saogmanual/SAOG15200.htm)onwards has been updated to clarify thatHMRC will not accept ambiguouscertificates.

5. SAO duties in respect of VATgroups

VAT group treatment allows two or morecorporate bodies to account for VATunder a single registration number with






one of the corporate bodies in the groupacting as the representative member. Thegroup is registered in the name of thatrepresentative member, who is responsi-ble, on behalf of all of the other membersof the group, for completing VAT returnsand paying and reclaiming VAT.

All supplies of goods and services made byany member of the group to a third partyoutside the group are treated as havingbeen made by the representative member.Similarly, any supply of goods or servicesmade by a third party outside the group toany member of the group is treated ashaving been made to the representativemember (further information is availablein the VAT Groups manual (www.hmrc.gov.uk/manuals/vgroups/Index.htm).

The SAO of a qualifying company musttake reasonable steps to ensure that thecompany establishes and maintainsaccounting arrangements that enable thecompany’s VAT liabilities to be calculatedaccurately in all material respects. Where acompany is the representative member ofa VAT group it is responsible, on behalf ofall of the other members of the group, forcompleting VAT returns and paying andreclaiming VAT. It is for the SAO of thatrepresentative member to be satisfied thattheir company is receiving accurate infor-mation from the other group companiesto enable it to accurately complete its VATreturns. It is HMRC’s view that thearrangements that will be needed to gainthis satisfaction will fall within the mainduty obligations of the SAO of the repre-sentative member.

The guidance at SAOG14335 (www.hmrc.gov.uk/manuals/saogmanual/SAOG14335.htm); 14460 (www.hmrc.gov.uk/manuals/saogmanual/SAOG14600.htm); 15100 (www.hmrc.gov.uk/manuals/saogmanual/SAOG15100.htm); 16710 (www.hmrc.gov.uk/manuals/saogmanual/SAOG16710.htm); 18400 (www.hmrc.gov.uk/manuals/saogmanual/SAOG18400.htm) and 18600 (www.hmrc.gov.uk/manuals/saogmanual/

SAOG18600.htm); has been updated toreflect HMRC’s view on this matter.

6. Applying the updated guidance

These updates to the SAOG do not rep-resent changes in policy and will applyfrom the date of publication.

HMRC appreciates that there is likely tobe a lengthy sign-off process for SAOcertificates. This may mean that somecertificates will have been drafted beforethe guidance was updated, but will besubmitted to HMRC after the updatedguidance is published. If, following publi-cation of the revised guidance, an SAOsubmits a certificate which does not com-ply with the updated guidance, HMRCwill consider the facts of the case todetermine whether the SAO had a rea-sonable excuse for not submitting a cer-tificate in accordance with the revisedguidance.

HMRC is also aware that its view on theduties of an SAO for the representativecompany of a VAT group was not previ-ously explicitly addressed by the SAOG.In relation to this issue, HMRC will notcharge penalties where previously SAOshave not acted in accordance with thenew guidance for any period up to thefirst period commencing after the publi-cation of this revised guidance.

Issued 5 August 2013”

Notice 827 European CommunityPreferences: export procedures

HMRC have published a revised (August2013) edition of Notice 827.

This notice has been amended to takeaccount of the new reciprocal preferentialtrade agreements between the EU and thefollowing countries: Serbia, Montenegroand Bosnia-Herzegovina.

It includes reference to the New Notice830: Tariff Preference: New GSP Rules oforigin (wef 01/01/11) and the SouthKorea Guide (wef 01/07/11) and alsoincludes some minor textual amendmentsto the notice.






It links to information on the ACP coun-tries that are part of the MAR agreementand to information on the CariforumStates.

It includes the name change for theDepartment for Business Innovation &Skills (BIS) from the Department forRegulatory Reform (BERR) and also theaddress change for the Association of Brit-ish Chambers of Commerce.

It includes the current details for applyingto be a UK or EC-wide approvedexporter and provides the address to for-ward INF4 Information Certificates.

It updates the autonomous countries thatthe EU grants a feature that is known asDonor country content at section 9 of thenotice.

It updates the scope and usage of prefer-ence documentation at section 20 of thisnotice including the current value limitsand takes account of the change to thevalue limits for exporting low-valuegoods.

The information on appeals shown at theend of the notice has been updated.

Notice 828 Tariff Preferences: Rulesof origin for various countries

HMRC have published a revised (August2013) edition of Notice 828.

This notice has been amended to takeaccount of the new reciprocal preferentialtrade agreement which came into forcefrom 1 July 2011 between the EU andSouth Korea. Under these procedures anyexporter can issue a preferential origindeclaration on an invoice or other com-mercial document where the value is€6,000 or less, and exporters known as‘approved’ exporters who have beenapproved by the relevant authorities to doso can issue invoice declarations for con-signments of any value

At section 9 the new minimal processinglists for the Cariforum (EPA) States andSouth Korea have been included.

It amends the ‘Wholly Produced’ lists atsection 4 and includes a new list for SouthKorea products.

It takes account of the reciprocal agree-ment between the EU and the Cariforum(EPA) States and the Interim MarketAccess arrangements (MAR) between theEU and certain ACP states.

It also takes account of minor changes tothe bilateral cumulation, some minor tex-tual amendments to the previous notice(December 2010) and minor additions tothe glossary at section10.

HMRC launch alternative disputeresolution service in full

HMRC have launched their AlternativeDispute Resolution service in full from2 September 2013. This follows a two-year trial, which began in specifiedregions before being made availablenationally in May 2012.

Alternative Dispute Resolution (ADR)uses independent HMRC facilitators toresolve disputes involving VAT (and directtaxes) between HMRC and customersduring a compliance check. It aims to finda fair and quick outcome for both parties,helping to reduce their costs and avoid atribunal. It is available to small businessand individual taxpayers where a tax issueis in dispute, whether or not an appealabletax decision or assessment has been madeby HMRC.

For more information on ADR, includinghow to apply for the process, visitwww.hmrc.gov.uk/adr/smei.htm.

Charging foreign hauliers in the UKmoves a step closer

A time-based levy for all heavy goodsvehicles (HGVs) using UK roads will beimplemented in April 2014. The levy willapply to both domestic and EU HGVdrivers. Northgate Public Services hasbeen appointed to design, build andfinance the foreign operator payment sys-tem which will be used as part of the






HGV levy. The contract with NorthgatePublic Services will run until 2019.

The foreign operator system creates anopportunity for foreign HGV drivers topurchase the levy prior to entry into theUK. The levy will be purchased throughsales channels including telephone sales,online sales and by other means of sale. Adatabase on the system will enable thosewho have not purchased the levy to beidentified. Those who do not pay the levywill face a fine. The levy will not dis-criminate between UK and other EUHGV drivers. UK HGV drivers will paythe levy as part of their VED.

For further details, seewww.gov.uk/government/news/charging-foreign-hauliers-in-the-uk-moves-a-step-closer.

HMRC’s new approach tosupporting customers who needextra help – responsesto consultation

HMRC have published a summary ofresponses received to their consultation onproposals to close their network ofenquiry centres and replace them withmobile advisors providing face-to-facehelp and other services for taxpayers withparticular needs, which ran betweenMarch and May 2013. A final decision onwhether to go ahead with the newapproach will be made in early 2014. Apilot for the new services is running inthe North East until October 2013.

The summary may be viewed at:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/225976/3805_NES_Consultation_summary_accessible.pdf.

Customs Information Paper (13) 45 –Tariff Preference: changes to the listof GSP beneficiary countries

HMRC have issued CIP (13) 45 dated22 July 2013. It concerns retrospectivechanges made to the list of GSP benefi-ciary countries, in particular the additionof South Sudan and the dissolution of theformer Netherlands Antilles, and may be

viewed in full athttp://www.hmrc.gov.uk/jccc/cips/2013/cip-13-45.pdf.

Customs Information Paper (13) 46 –Tariff Preference – Lifting of traderestrictions between the EU andMyanmar and restoration ofMyanmar’s GSP preferential status

HMRC have issued CIP (13) 46 dated26 July 2013. It announces the liftingrestrictive measures on trade between theEU and Myanmar, because of its politicalsituation and human rights violations.

The paper may be viewed in full athttp://www.hmrc.gov.uk/jccc/cips/2013/cip-13-46.pdf

Customs Information Paper (13) 47 –Tariff Preference: Implementation offree trade agreement between EUand Colombia

HMRC have issued CIP (13) 47 dated5 August 2013. It announces that the EUhas concluded a reciprocal preferentialtrade agreement with Colombia, whichwill apply from 1 August 2013.

The paper may be viewed in full athttp://www.hmrc.gov.uk/jccc/cips/2013/cip13-47.pdf.

Customs Information Paper (13) 48 –Customs duty repayments

HMRC have issued CIP (13) 48 dated7 August 2013. It announces a new data-base for the repayment of customs duty,expected to go live on 2 September 2013.

The paper may be viewed in full athttp://www.hmrc.gov.uk/jccc/cips/2013/cip13-48.pdf

European Commission

Protecting Intellectual PropertyRights: Customs detain €1 billionworth of fake goods at EU bordersin 2012

EU Customs detained almost 40 millionproducts suspected of violating intellectual






property rights (IPR) in 2012, accordingto the Commission’s annual report oncustoms actions to enforce IPR.

Cigarettes accounted for a large numberof interceptions (31%), miscellaneousgoods (e.g. bottles, lamps, glue, batteries,washing powder) were the next largestcategory (12%), followed by packagingmaterials (10%). Postal and courier pack-ages accounted for around 70% of cus-toms interventions in 2012, with 23% ofthe detentions in postal traffic concerningmedicines.

For further information see the pressrelease (IP/13/761 –http://europa.eu/rapid/press-release_IP-13-761_en.htm),the questions and answers(MEMO/13/738 – http://europa.eu/rapid/press-release_MEMO-13-738_en.htm?locale=en) and the full report(http://ec.europa.eu/taxation_customs/customs/customs_controls/counterfeit_piracy/statistics/index_en.htm).

Fight against tax fraud and taxevasion: a new EU campaign

A new EU campaign against tax fraud andtax evasion has just been launched by theEuropean Commission. A video is avail-able in 23 EU languages fromhttp://ec.europa.eu/taxation_customs/taxation/tax_fraud_evasion/missing-part_en.htm,also in 23 languages, along with key infor-mation on the problem and the actionsbeing taken.

The fight against tax fraud and tax evasionis on the agenda of the G20 Summit of5–6 September. Seehttp://www.european-council.europa.eu/home-page/highlights/global-economy-on-top-of-the-g20-summit-agenda?lang=en.

Tribunals

First-tier Tribunal

Palatial Leisure Ltd v HMRC(2013) TC02792VAT: purchase of gaming machines

A company (P), which operated severalgaming machines, had accounted for VAT

on the basis that its supplies wereexcluded from exemption under UK law.It subsequently submitted a repaymentclaim on the basis that its supplies prior toDecember 2005 had qualified for exemp-tion under EC law. HMRC accepted theclaim in principle but issued a ruling thatthe amount of the claim for the periodending March 2005 had to be restricted totake account of the fact that P hadreclaimed input tax on the purchase ofgaming machines. P appealed, contendingthat the input tax should be treated asresidual rather than as wholly attributableto exempt supplies, on the basis that themachines had been used to make taxablesupplies after December 2005. The First-tier Tribunal dismissed P’s appeal, observ-ing that HMRC had accepted that inputtax incurred after 31 March 2005 couldbe treated as residual, and holding thatregulation 101(2)(d) had to be interpretedas meaning that ‘there is no place forhindsight in ascertaining whether goodsor services are used or to be used formaking taxable or exempt supplies outsidethe “longer period adjustment” – exceptin the case of capital goods. In the inter-ests of legal certainty, the ascertainment ofthe purposes for which goods or servicesare used or are intended to be used mustbe made at the time the input VATbecomes chargeable.’

S Tarafdar (t/a Shah Indian Cuisine) vHMRC (2013) TC02794

Tribunal Procedure (First-Tier Tribunal)(Tax Chamber) Rules (SI 2009/273),rule 10

In a case where HMRC withdrew anassessment on a restaurant proprietor, theproprietor applied for costs. The First-tierTribunal dismissed the application, hold-ing that HMRC had not actedunreasonably.

B Burton v HMRC (2013) TC02797

VAT: incorporation of barn intoexisting house

The owner of an 18th century houseenlarged it by incorporating an existing






barn, and claimed a refund of VAT underVATA 1994, s 35. HMRC rejected theclaim on the basis that the work did notqualify as a ‘residential conversion’. TheFirst-tier Tribunal dismissed the owner’sappeal against this decision.

Wrag Barn Golf & Country Club vHMRC (No 3) (2013) TC02802

VAT: whether letter constituted anoption – whether option irrevocable

A married couple acquired a farm in1967. In 1987 they arranged for a newly-incorporated associated company to con-vert part of the farmland into a golfcourse. In June 1990 the couple registeredfor VAT as a partnership, and opted to taxthe golf course. In February 1991 thecouple entered into a partnership agree-ment with their two sons to operate a golfclub on the course. In 2001 a VAT officerinspected the partnership records andformed the opinion that the partnershiphad failed to abide by its option to tax thegolf course. HMRC issued a ruling thatthe option was irrevocable. The partner-ship appealed, contending that the optionhad only been made by the couple whoowned the land, and did not bind theseparate partnership formed in 1991which included their sons. Judge Greenrejected this contention and dismissed theappeal, but the Upper Tribunal remittedthe case for rehearing by a different judge.At the rehearing, Judge Sinfield upheldJudge Green’s decision, finding that thegolf course had been an asset of thepartnership at the time the election wasmade.

Simple Solutions GB Ltd v HMRC(2013) TC02809

Authenticity of invoices disputed

HMRC issued assessments on a company(S) in the construction industry, on thebasis that it had reclaimed input tax onfalse invoices. The First-tier Tribunalallowed S’s appeal, finding that theinvoices were genuine and representedgenuine supplies, and awarded costs to S.

Drumkinnon Joinery & Building Ltd vHMRC (2013) TC02810

Default Surcharge – Rate of surchargewhere business transferred asgoing concern

In 2010 a sole trader (H) transferred hisbusiness, including his VAT registration,to a newly-incorporated company (D). In2011 D submitted a VAT return late.HMRC imposed a default surcharge at15%. The First-tier Tribunal allowed D’sappeal, observing that in computing the15% surcharge, HMRC had taken intoaccount several defaults by H before hehad transferred the business. Judge Shep-pard held that when H’s VAT registrationwas cancelled, ‘his surcharge liability com-pliance history ceased. A new historycommenced on the registration of theseparate entity (D).’

Rapid Sequence Ltd v HMRC(2013) TC02826

VAT: company supplying locumdoctors to hospitals

A company (R) supplied medical doctorsto hospitals on a locum basis. HMRCissued a ruling that it was required toaccount for tax on its supplies. Rappealed, contending that its suppliesshould be treated as exempt under VATA1994, Sch 9, Group 7, Item 5. The First-tier Tribunal rejected this contention anddismissed the appeal. Judge Herringtonheld that although R’s supplies appearedto fall within the wording of Item 5, thatprovision had to be interpreted in accord-ance with Article 132(1)(c) of Directive206/112/EC, and that R’s services didnot amount to ‘medical care’ within Arti-cle 132(1)(c). Item 5 had to be given ‘aconforming construction so that it is con-sistent with the UK’s obligation not togrant an exemption which goes beyondthe permitted scope of the exemption inArticle 132(1)(c)’. Therefore Item 5should be construed as referring to ‘theprovision of medical care services pro-vided by a deputy’, rather than simply to‘the provision of a deputy’.






Chancellor, Masters & Scholars of theUniversity of Cambridge v HMRC(No 2) TC/10/06359 unreported.Partial Exemption – University

A university, which was partly exempt andhad agreed a special method for attribut-ing its input tax, reclaimed input tax onprofessional fees relating to the manage-ment of an endowment fund whichinvested donations which the universityreceived, and which was used to financeboth taxable and exempt activities.HMRC rejected the claim on the basisthat the university’s investment activitieswere not an economic activity (and if ithad been an economic activity, the feeswould have related to exempt supplies).The First-tier Tribunal allowed the uni-versity’s appeal, holding that the input taxshould be treated as residual and as partlyrecoverable under the university’s specialmethod. Judge Connell held that ‘the VATsystem achieves the greatest degree ofsimplicity and neutrality when the tax islevied in as general a manner as possibleand when its scope covers all stages ofsupply’. He specifically rejected HMRC’scontention that ‘overheads relating to anon-economic activity undertaken for thepurchase of an economic activity shouldnot be regarded as recoverable’.BS Eyin v HMRC (No 2)(2013) TC02834HMRC mitigating penalty by 40% –no further mitigation appropriate

HMRC formed the opinion that a trader(E) had underdeclared his turnover, andimposed a penalty, which they mitigatedby 40%. E appealed. The First-tier Tribu-nal slightly reduced the amounts of theunderlying assessments, but upheld theimposition of the penalty. Judge Nowlanheld that ‘the percentage reductions thatHMRC has conceded were certainly fair,if not generous’.General Motors UK Ltd v HMRC(2013) TC02835Valuation of self-supply

A major car manufacturer (G) hadaccounted for VAT on the basis that,

when it took into its own use a car whichit had manufactured or imported, it hadmade a deemed self-supply and VAT waschargeable on two-thirds of the retail listprice of each car. Subsequently it submit-ted a substantial repayment claim on thebasis that it should have accounted forVAT on a lower amount. HMRC rejectedthe claim and G appealed.

The First-tier Tribunal reviewed the evi-dence in detail and allowed G’s appeal inprinciple. Judge Hellier held that, for theperiod from 1987 to 1993, the value ofthe self-supply should be calculated as thelower of the purchase price of the cars andthe cost of their cars. For the period from1994 to 1996, the value of the self-supplyshould be calculated by reference to thepurchase price of the cars. For this pur-pose, the ‘purchase price’ should bedefined as ‘the price in which someone inthe appellant’s position would have paidfor the cars had it bought them at thetime of their appropriation’. In the case ofimported cars, this was ‘the import pricepayable to the relevant sister companyunder whatever agreement subsistedbetween them at the time’. In the case ofcars assembled in the UK, this was ‘the listprice less the discount and rebates theappellant would have got as a bulk pur-chaser in its bargaining position’, exceptthat where a car could have been pur-chased from a sister company for less thanthis amount, ‘that import price would bethe purchase price’. The ‘cost price’should be defined as including ‘all theexpenses attributable to bringing the carto its condition at the time of appropria-tion and includes direct expenses ofmanufacture, related overheads and cost ofdevelopment and design’. The appeal wasadjourned in the hope that the partiescould agree the figures.

Chancellor, Masters & Scholars of theUniversity of Cambridge v HMRC(No 2) (2013) TC02836

University: partial exemption

A university, which was partly exempt andhad agreed a special method for attribut-ing its input tax, reclaimed input tax on






professional fees relating to the manage-ment of an endowment fund whichinvested donations which the universityreceived, and which was used to financeboth taxable and exempt activities.HMRC rejected the claim on the basisthat the university’s investment activitieswere not an economic activity (and if ithad been an economic activity, the feeswould have related to exempt supplies).The First-tier Tribunal allowed the uni-versity’s appeal, holding that the input taxshould be treated as residual and as partlyrecoverable under the university’s specialmethod. Judge Connell held that ‘the VATsystem achieves the greatest degree ofsimplicity and neutrality when the tax islevied in as general a manner as possibleand when its scope covers all stages ofsupply’. He specifically rejected HMRC’scontention that ‘overheads relating to anon-economic activity undertaken for thepurchase of an economic activity shouldnot be regarded as recoverable’.

Sunnyside Property Company Ltd vHMRC (2013) TC02839

VAT: lease of nursing home – whetherseparate supply of facilities

A company (SN) operated a nursinghome. In 2003 the ownership of thepremises was transferred to a newly-incorporated associated company (SC),which leased them back to SN. SC subse-quently reclaimed input tax on the refur-bishment of the premises. HMRCrejected the claim on the basis that theinput tax was wholly attributable toexempt supplies. SC appealed, contendingthat it was making separate standard-ratedsupplies of facilities in addition to itsexempt supplies of a lease of the premises.The First-tier Tribunal rejected this con-tention and dismissed the appeal, holdingthat SC was making a single compositeexempt supply of property and services,and that none of the input tax was attrib-utable to taxable supplies.

Upper Tribunals

Davis & Dann Ltd v HMRC (andrelated appeal), UT [2013] UKUT374 (TCC)

Input Tax – Razor blades

A company (D) reclaimed input tax onthe purchase of a large quantity of razorblades. HMRC rejected the claim on thebasis that it appeared that the transactionswere connected to MTIC fraud. Dappealed. The First-tier Tribunal dismissedthe appeal, finding that D’s directorsshould have known that the transactionswere connected to MTIC fraud. Howeverthe Upper Tribunal reversed this decision.Judge Gammie observed that the First-tierdecision gave the impression ‘that thequantity of razor blades purchased andsold by the appellants’ had been the con-clusive factor, and expressed the view that‘the transactions were entirely explicableas ordinary market transactions’. He heldthat the First-tier Tribunal had ‘erred inconcluding that the only reasonableexplanation for the circumstances inwhich the appellants’ purchases took placewas that they were connected to fraud’.

HMRC v Able UK Ltd [2013] UKUT318 (TCC)

EC Directive 2006/112/ECArticle 151(1)(c)

A UK company supplied ‘ship decommis-sioning services’ to the US Navy. HMRCissued a ruling that it was required toaccount for VAT on these supplies. Thecompany appealed, contending that theyqualified for exemption under Arti-cle 151(1)(c) of EC Directive2006/112/EC. The Upper Tribunaldirected that the case should be referredto the ECJ, which held that Arti-cle 151(1)(c) ‘must be interpreted asmeaning that a supply of services such asthat at issue in the main proceedings,made in a Member State party to theNorth Atlantic Treaty and consisting indismantling obsolete ships of the Navy ofanother State party to that treaty, isexempt from VAT under that provisiononly where those services are supplied for






staff of the armed forces of that otherState taking part in the common defenceeffort or for the civilian staff accompany-ing them, and those services are suppliedfor members of the armed forces who arestationed in or visiting the Member Stateconcerned or for the civilian staff accom-panying them’.

Following this decision, the Upper Tribu-nal gave judgment in favour of HMRC.

London College of Computing Ltd vHMRC UT [2013] UKUT 404 (TCC).

Education-Definition of ‘eligible body’

A company (L) provided computertuition. Initially it accounted for VAT onits supplies, but it subsequently submitteda repayment claim on the basis that itshould have treated them as exempt sup-plies of education. HMRC rejected theclaim on the basis that L was not aneligible body. L appealed, contending thatit had an ‘articulation agreement’ withMiddlesex University and should there-fore be treated as a college of thatuniversity. The Upper Tribunal, in agree-ing with the First-tier Tribunal, dismissedL’s appeal, holding that L had not in factqualified as an ‘eligible body’. JudgeHellier held that L did not ‘have objectssimilar to the aims of a public bodysupplying school or university educationor vocational training’. Judge Bishoppheld that there was nothing in the articu-lation agreement ‘which could conceiv-ably be construed as being intended toconstitute (L) as a college of theuniversity’.

Court of Justice of theEuropean Union

Finanzamt Düsseldorf-Mitte v IberoTours GmbH (Case C-300/12, ECJ);18 July 2013 unreported(Advocate-General’s opinion)

European Community Law –‘Consideration’ (Article 11A1(a))

In a German case, a company whichtraded as a travel agent granted customers

discounts from the prices originallycharged by tour operators, and claimedthat these discounts should be deducted incomputing the taxable amount. The taxauthority rejected the claim, the companyappealed, and the case was referred to theECJ. Advocate-General Wathelet deliveredan Opinion in favour of the company,applying the principles laid down in ElidaGibbs Ltd.

David Rudling and Alan DoltonLexisnexis

EDITORIAL

Pension fund costs

The recent decision in the EuropeanCourt of Justice in PPG Holdings BV(PPG) (C-26/12) has provided an oppor-tunity for businesses to reclaim VAT onthe costs that have been incurred on adefined benefit pension fund.

Reclaim opportunity

This decision permits employers toreclaim VAT on costs incurred on manag-ing its own pension fund. HMRC haveuntil now permitted businesses to reclaimthe VAT incurred on day-to-day manage-ment costs. This decision may permitbusinesses to reclaim the VAT incurred onthe investment activities. Businessesshould submit a protective claim for thisVAT as soon as possible for the last fouryears.

For the VAT to be reclaimed the manage-ment and investment services need to besupplied to the company and not thepension fund. The invoices need to beaddressed to the business and paid for bythe business. In addition, the costs are notto be passed on to the pension fund.Claims must be quantified as to the periodand amount involved and HMRC willexpect the usual supporting documenta-tion for this claim. It is expected thatHMRC will be particularly interested inensuring that there has been no rechargeof costs to the pension funds.






HMRC’s view

HMRC’s opinion was that the VAT onthe costs of administering and managingthe fund was deductible but the VATcredits could not be claimed in respect ofinvestment management costs. The reasonis that HMRC regarded these supplies asbeing made to the pension fund for finan-cial supplies made by the fund. As anyVAT incurred was for an exempt supplythe VAT was not deductible.

One difficulty with the decision is thatthe ECJ has not, as is usual, finally deter-mined the case but outlined the principlesthat the national court must then apply.Although this decision has been addressedto the Dutch court the principles outlinedare clear and HMRC will be obliged tofollow them, although HMRC will notextend the principles in any way. The ECJdid raise points for the Dutch nationalcourt to determine. The matters to bedetermined are detailed in the ECJ’s rea-soning, discussed below.

ECJ Decision

The ECJ decision was more favourable tothe taxpayer than the Advocate General’sopinion. The Advocate General held thatVAT on day-to-day administration costswere deductible and the VAT on the costsof the management costs were notdeductible. The ECJ held that a taxableperson, who has set up a pension fund inthe form of a separate entity to safeguardthe pension rights of his employees, mayreclaim the VAT incurred on servicesrelating to the management and operationof that fund. The ECJ included one pro-viso, that there must exist a direct andimmediate link which is apparent from allthe circumstances of the transaction inquestion.

There was an alternative question asked ofthe ECJ; whether the supplies should havebeen exempted as a supply to a specialinvestment fund. As the first question(whether the VAT incurred could bereclaimed) had be answered in theaffirmative this question need not be

answered. The ECJ also pointed out thatthis question had been addressed in thedecision Wheels Common Investment FundTrustees and Others Case C424/11.

Reasoning

The following general points were madeby the ECJ when coming to its decision:

• the VAT system is meant to relievebusinesses entirely of the burden ofthe VAT paid or payable in the courseof its economic activities;

• the VAT system is to ensure completeneutrality of taxation of all economicactivities, whatever their purpose orresults;

• the existence of a direct and immedi-ate link between an input and anoutput give rise to the right to deduct;and

• a taxable person has a right to deducteven where there is no direct andimmediate link between a particularinput and outputs where the costsincurred are part of the general costsand are components of the price ofthe supplies made. These costs stillhave a direct and immediate link withthe taxable person’s economic activityas a whole

The ECJ then made the following specificpoints relating to the services acquired forthe purpose of the administration ofemployees’ pensions and the managementof the assets of the pension fund. The ECJfound that PPG had set up the fund tocomply with a legal obligation imposedon it as an employer. Consequently thesecosts form part of its general costs. TheECJ held that it was for the referringcourt to verify that these costs do becomecomponent parts of the price of PPG’sproducts.

Thus the ECJ held that the if there was noright to deduct the input tax paid thetaxable person would be deprived of thetax advantage resulting of the deductionsystem and the neutrality of VAT would






also no longer be guaranteed. Thus, theECJ held that the VAT on the costs couldbe deducted.

John DavisonIndependent Indirect tax consult-ant

CASE AND COMMENT

Mercedes-Benz FinancialServices UK Limited [2013]UKFTT 381 (TC)

First-tier Tribunal

Mercedes-Benz Financial Services Lim-ited (“MBFS”) had offered a leasing prod-uct called “Agility” since 2007. The issuein this appeal was whether MBFS wasmaking a supply of goods or a supply ofservices in doing so. MBFS considered itwas a supply of services, but HMRCdisagreed. MBFS therefore appealed tothe Tribunal.

MBFS considered that Agility was a rentalagreement with an option to purchase andthat in the normal course of events, titlein the motor vehicle would not passunless and until the customer chose topurchase the vehicle. HMRC consideredthat the mere possibility that title wouldpass was sufficient to make supply a supplyof goods, and that it did not need to beinevitable that title would pass.

The Tribunal examined the choices opento customers who obtained finance fromMBFS. Those customers had threechoices, namely:

• if the customer decided that he/shewould like to purchase the vehicle,then a hire purchase was recom-mended;

• if the customer decided that he/shewould not like to purchase the vehi-cle, then a leasing product wasrecommended.

• if the customer was undecided, orwanted to keep their options open,then the Agility product wasrecommended.

Agility was thus marked as a separateproduct, and gave the customer theoption at the end of the lease (a) topurchase the car; (b) to return the car; or(c) purchase the car and part-exchange itfor a new one.

The Tribunal considered the detail of theagreement and concluded that it was akinto a hire purchase agreement rather than alease. It did so by comparing the agree-ment to the hire purchase agreement,noting the similarities and concluding thatthis therefore meant the Agility contractwas also a hire purchase agreement.Examples included:

• Both were described as a hire purchaseagreement for the purposes of theConsumer Credit Act 1974.

• Both incorporated an option to pur-chase the vehicle, and had a nominalfee when the option was exercised.

• Both gave the customer the right notto exercise the option to purchase, asunder both it was not obligatory forthe customer to purchase the car.

• Both contained a detailed breakdownof the cost of the vehicle and thecharge for credit.

• The financial structuring of both wascomparable.

The Tribunal noted Article 14 of thePrincipal VAT Directive, which stated:

‘1. “supply of goods” shall mean the transferof the right to dispose of tangible propertyas owner.

2. In addition to the transaction referred to inparagraph 1, each of the following shall beregarded as a supply of goods:

(b) the actual handing over of goods pur-suant to a contract for the hire of goodsfor a certain period, or for the sale ofgoods on deferred terms, which providesthat in the normal course of eventsownership is to pass at the latest uponpayment of the final instalment.’

The Tribunal concluded that “the descrip-tion of the agreement as a hire purchase,the provision for a deposit payment, thespecified financial information including






the cash price for the vehicle, the substan-tial capital payment inherent in the con-tract structure, and the option to purchasewere compelling indicators of Agilitybeing a contract of sale of a car.” It addedthat “on a proper analysis the sole realisticoption under the agreement was to pur-chase the vehicle”.

When added to other evidence such aswebsite and marketing material, this ledthe Tribunal to conclude that, in thenormal course of events, “the possiblepassing of title was an essential feature ofAgility rather than an eventuality whichmay only arise in limited and exceptionalcircumstances … The transfer of owner-ship was, therefore, central to the Agilitycontract, not tangential.”

Accordingly, the Tribunal concluded thatthis constituted a supply of goods.

Commentary

This is not the last word in this matter, asMBFS have appealed to the UpperTribunal. One would expect that a prin-cipal issue on appeal to be how to analysethe choices that the customer genuinelyhad at the end of the Agility contract –even if it may be very likely that mostcustomers will exercise the option to pur-chase the car, it is not inevitable, and sodo you look at what most customers arelikely to do? In essence, the First-TierTribunal’s answer is “yes”. But, given theincreasing sophistication and variety offinancing products in the automotive mar-ket, other products could arise where theanswer is less clear than the First-TierTribunal has concluded in this case.Therefore, this case could give rise tosome important jurisprudence on leasingissues, and may even require a reference tothe Court of Justice of the EuropeanUnion to clarify this point.

Fiscale Eenheid PPGHoldings (CaseC-26/12)(“PPG”)

Court of Justice of theEuropean Union (CJEU)

The Decision

This case considered whether an employerhad the right to deduct the input taxincurred on supplies made to an employeepension fund (but paid for by theemployer), and the exact scope of such aright, should it be deemed to exist.

In this case, PPG and its subsidiaries wererequired under Dutch law to put in placepension arrangements for their employees.The relevant law stipulated that thesearrangements should take the shape of afund-based pension scheme and that thefund should be set up as a separate legalentity.

The fund was set up as a defined-benefitfund, meaning that the amounts paid toemployees following retirement weredetermined from the outset and were notdependent on the performance of variousinvestments made by the fund. After thefund was set up, PPG contracted withvarious suppliers for administration, assetmanagement, auditing and consultancyservices to be provided to the fund. Theseservices were paid for by PPG and werenot on-charged to the pension fund.

PPG attempted to deduct the VATcharged by these various suppliers as itsown input tax, claiming that these costsrepresented general or overhead costs ofthe business and should therefore berecoverable.

The Dutch tax authorities refused toallow PPG to deduct the VAT incurred onthese services, suggesting that this VATwas not PPG’s to deduct, as PPG couldnot be regarded as the recipient of theservices. The authority also argued thatthe pension fund did not qualify as aspecial investment fund.






The following questions were referred tothe CJEU.

1. Can a taxable person who has, underthe requirements of national law,established a separate pension fund forhis employees, deduct the tax whichhe has paid on the basis of servicessupplied to him in respect of theimplementation and operation of thefund?

2. Can a pension fund such as the one atissue here, be classified as a specialinvestment fund within the terms ofArticle 13B(d)(6) of the Sixth VATDirective?

The CJEU held that an employer that hasset up a separate pension fund for itsemployees can recover the VAT it incurson management and operation servicesprovided to the fund, as long as it canshow a direct and immediate link betweenthe services received and its taxableactivities. The CJEU set out that even if alink could not be established between theinput tax incurred and a particular trans-action, a deduction could be made as longas the costs of the services in questionwere part of the business’ general costsand formed a component of the price ofgoods/services supplied.

In PPG’s case, it was held that the solereason for setting up the fund and acquir-ing the relevant services was to complywith a legal obligation, and given that thisobligation arose by virtue of PPG’s taxableactivities, it could be considered that therewas a direct and immediate link.

The CJEU did not agree with the sugges-tion that PPG could have set up the fundin an alternative manner, i.e. not as aseparate legal entity, and therefore recov-ered the tax directly. The CJEU consid-ered that taking such a view would restrictthe ability of a taxable person to choosean organisational structure and was there-fore not tenable.

The CJEU applied the criteria set out inWheels Common Investment Fund Trus-tees Ltd Case C-424/11 to determine theanswer to the second question and had no

hesitation in concluding that the fund atissue here did not fall within the defini-tion of a special investment fund.

Commentary

This judgment could allow many employ-ers to recover more VAT than they cur-rently do under UK law and HMRCpractice. However, the exact ability ofemployers to do so will depend on a rangeof factors in each particular case.

HMRC have yet to release any guidancein relation to the application of PPG inthe UK, in particular whether employersmay be able to recover all of the VATincurred in relevant situations, as opposedto the “70/30 split” currently applied byway of concession in many cases.

It should be noted that, even on a pro-spective basis, entities will have to con-sider the manner in which costs arecurrently invoiced and incurred, as well asany possible recharge of costs, as this maybe determinative of whether the broaderrecovery position suggested by the CJEUin PPG is applicable.

Oliver Jarratt, Amy Bache & Can-dice WalkerDeloitte LLP

CONTEXT IS EVERYTHING!

The CJEU interpretation ofVAT law

How many times over the years have weread in Court of Justice of the EuropeanUnion (CJEU) opinions and judgmentsthat VAT exemptions under the Directivemust be interpreted strictly since theyconstitute exceptions to the general prin-ciple that VAT is to be levied on eachsupply for consideration which is made bya taxable person. That expression hasbecome a mantra which the Court repli-cates – almost on a cut and paste basis –whenever it is asked to provide guidanceto National Courts.






As a practitioner, the mantra has becomeentrenched over the years. One instinc-tively knows that any attempt to widenthe meaning of an exempting provisionwill be met with some resistance. It wassurprising, therefore, to note that, despitesuch entrenchment, the Court will, some-times, be a bit more flexible. Two recentcases have highlighted this. The first caserelates to the exemption for supplies ofaircraft and the second case relates to thesupply of services in connection with themanagement of special investment funds.

A Oy (Case C-33/11)

In simple terms, this case related to theacquisition by A Oy (A Finnish company)(‘A’) of a business jet from a manufacturerbased in France. ‘A’ failed to account forany acquisition VAT when the aircraftarrived in Finland and the Finnish TaxAuthority (the Authority) issued an assess-ment to collect the tax that was purport-edly due on the taxable acquisition inFinland.

Article 15 of the 6th Directive falls underthe heading ‘Exemption of exports fromthe Community and like transactions andinternational transport’. Article 15(6)exempts from VAT the supply, modifica-tion, repair, maintenance, chartering andhiring of aircraft used by airlines operatingfor reward chiefly on international routes.Employing a strict interpretation of theVAT exemption contained in Arti-cle 15(6), (which the CJEU had, hitherto,encouraged), the Authority contendedthat, as ‘A’ was not an airline operating forreward chiefly on international routes, theexemption from VAT could not apply tothe acquisition of the aircraft. In essence,the Authority took the view that theexemption only applied if the ‘use’ of theaircraft for international flights was by ‘A’.Consequently, according to the Authority,VAT was payable by ‘A’ on the taxableacquisition of the aircraft.

But that was not the end of the story! ‘A’had a sister company B Oy (‘B’) and,whilst ‘A’ was registered as the owner ofthe aircraft with the Finnish Civil Aviation

Authority, ‘B’ was designated as the userof the aircraft. ‘B’ was in fact in thebusiness of organising international char-ter flights and of ensuring that the aircraftin its control were maintained and man-aged correctly. Under an agreement with‘A’, ‘B’ was entitled to hire the aircraftfrom ‘A’ for its own commercial purposes(ie for international charter flights). TheAuthority considered that, even though‘B’ was clearly an ‘airline’ (as defined), the‘use’ of the aircraft by ‘A’ was not ‘use byan airline’ and did not qualify forexemption.

Nonsense said the Court! – One cannotlook at the words of the law in isolation.It is necessary to also take into accountboth the context and the objective pur-sued by the Directive. Clearly, here, theCJEU considered that the context andobjective of the provision in question wasto grant an exemption for the supply ofaircraft when they are intended chiefly foruse on international routes. The Directivedoes not make the exemption conditionalon the identity of the user of the aircraftin question but, simply, requires that theaircraft is to be so used for the supply of itto benefit from the exemption. It seemstherefore that, provided the aircraft is tobe used for the requisite purpose at somestage along the supply chain, the supply ofthe aircraft will qualify for exemption. Somuch for a strict interpretation!

I have to say that I was surprised when theCourt delivered this judgment. Given themantra, I had expected it to take a narrow,literal approach to the interpretation ofthe Directive. By allowing the exemptionto apply to any supply of the aircraftwithin the supply chain provided that theaircraft is ultimately put to the requisiteuse, I can’t help feeling that the scope ofthe exemption has been somewhatwidened. Not that I am complaining. Thejudgment removes a great deal of com-plexity for aircraft operators and owners.Provided the aircraft is ultimately used byan airline operating for reward chiefly oninternational routes, any VAT charge inthe supply chain should be removed.






GfBk (Case C-275/11)

A financial services case – (not particularlymy forte). The question here was whetherthe services provided under a contract byGfBk to an Investment ManagementCompany (IMC) qualified for VATexemption under the provisions of Arti-cle 13B(d)(6) of the 6th Directive whichexempts the management of specialinvestment funds (as defined by MemberStates).

Under the contract, GfBk simply pro-vided the IMC with investment recom-mendations relating to the purchase andsale of securities. It was up to the IMCwhether or not to act on thoserecommendations. However, GfBk wasprovided with daily statements as to thecomposition of the particular fund forwhich it provided advice. GfBk sought aruling from the German tax authority thatthe advisory services it provided to theIMC fell within the term ‘management ofspecial investment funds’. The German taxauthority said ‘no’ (taking a narrow view)third party advisory services were not‘management services’ and were not cov-ered by that term. Not surprisingly, GfBkappealed and, during the litigationthrough the German courts the matterwas referred to the CJEU for a prelimi-nary ruling.

On the face of it, adopting a narrow literalapproach, one can see where the Bun-desgerichtshof (the referring GermanCourt) were coming from! Surely, thefunction of ‘management’ of an invest-ment fund (special or otherwise) is afunction that can only be undertaken bythe person engaged to manage it (ie theFund Manager)? If that is correct, it isdifficult to understand how a supply ofadvisory services provided to the FundManager by an entirely separate thirdparty could ever be regarded as part andparcel of the Manager’s function. In myview, that’s a bit like saying that the supplyof legal text books by a publisher to a lawfirm is a supply of legal services! It clearlyisn’t, it’s a cost component of the legal

services. To say that it is a supply of legalservices would be to contort theimagination.

Anyway, what do I know? In its wisdom,the CJEU ruled that the services providedby GfBk do actually fall within the term‘management of special investment funds’.It is the nature of the service being pro-vided which is important and not theidentity of the person making the supply.The Court confirmed that to qualify forexemption, however, the services in ques-tion ‘must, viewed broadly, form a distinctwhole and be specific to and essential forthe management of a special investmentfund’. Well, that’s clear!

According to the Court, in order todetermine whether advisory services pro-vided to the IMC by a third party fallwithin the concept of ‘management ofspecial investment funds’, it is necessary toexamine whether the advisory service isintrinsically connected to the activitycharacteristic of an IMC so that it has theeffect of performing the specific andessential functions of such management.

When the Advocate General delivered hisopinion in this case, he said that to deter-mine whether an intrinsic connectionexists between a service and the activitycarried out by a common fund, in short,it is a question of identifying those ser-vices that are typical of a common fundand to single them out from other eco-nomic activities. The Advocate Generalhad used a simple example of this in hisopinion by stating that functions such asthe computation of units and shares or aproposal to purchase or sell assets areclearly activities that are typical of aninvestment fund but not of a constructioncompany. However, whilst there is noth-ing to preclude a construction companyfrom carrying out financial investmentactivities, these activities would not beregarded as characteristic or typical ele-ments of, and in that sense, specific to, thebusiness of construction.

In the case of advisory and informationservices such as those provided by GfBk,






the Court agreed with the Advocate Gen-eral that such activities are activities spe-cific to a special investment fund. GfBkmakes recommendations concerningtransactions which the IMC may subse-quently carry out in its capacity as amanager of a special investment fund.Consequently, the services provided byGfBk are eminently characteristic of acollective investment undertaking.

For a service to be autonomous (ie ‘adistinct whole’), it is important that theservice does not become ‘blurred’ withother services provided by the recipient ofthe third party’s services. Accordingly, aservice that, ‘viewed broadly’, forms a‘distinct whole’ is one that cannot beconfused with other services already per-formed by the recipient. For example,where an IMC already carries onaccounting activities that is evidenced bythe fact that it has an internal accountsdepartment which covers the whole ofthe service, it would be difficult to differ-entiate an accounting service provided bya third party from the one already per-formed internally by the IMC. In otherwords, in such an example, the serviceprovided by the third party would loseautonomy because the recipient of theservice already performs the same serviceitself.

This judgment provides excellent guid-ance on the issue of whether outsourcedservices can or cannot benefit from VATexemption. Although this case was con-cerned solely with the issue of whether‘advice and guidance’ services provided byGfBk could qualify as ‘management ofspecial investment funds’, the rationale ofthe case may be applicable in many otherinstances. Provided the outsourced servicemeets the criteria of being intrinsicallyconnected, autonomous and continuous,there is clearly room to argue that otherservices provided by third parties may alsobenefit from VAT exemption.

It is clear from these judgments that wheninterpreting VAT law (and in particularwhen interpreting exemptions), that asimple literal view is not always possible

nor desirable. Following the A Oy judg-ment, it is clear that the exemption forsupplies of aircraft applies to all transac-tions where the ultimate use of the aircraft(by a party not necessarily directly con-nected with the transaction) is for a quali-fying purpose. Similarly, in the world offund management, it is clear that theexemption for the supply of the manage-ment of special investment funds applieswhere functions ordinarily performed bya fund manager are, in certain circum-stances actually performed by a third partysub-contractor.

Graham C Brearley LLB(Hons)Grant Thornton UK LLP

HERE COMES THE SUN

Solar panel dumping dispute

‘After weeks of intensive talks, I canannounce today that I am satisfied with theoffer of a price undertaking submitted byChina’s solar panel exporters, as foreseenby the EU’s trade defence legislation.Thisis the amicable solution that both the EUand China were looking for’.

On 27 July 2013, EU Trade Commis-sioner Karel De Gucht announced whatappeared to be the beginning of the endfor the European Union’s long-running,and much publicised, dispute with Chinaover concerns that Chinese-origin solarpanels and components are being illegallydumped into the EU market to the detri-ment of European industry. The solarpanel saga acts as an interesting indicatorof the political and economic pressuresthat may be applied through trade defencemeasures, and a (precautionary) signpostfor European businesses seeking to sourceproducts and components from or exporttheir goods to China.

Introduction

Mr De Gucht’s announcement followednine months of investigation by the Euro-pean Commission into claims that Chi-nese solar panel manufacturers are selling






their products into the European marketbelow cost thanks to substantial govern-ment subsidies received from Beijing,undercutting European producers andputting European jobs at risk. This led toa preliminary decision by the EuropeanCommission to impose anti-dumpingduties at rates as high as 67.9% on importsof the affected goods from China.

As a result of the agreement reachedbetween China and the European Com-mission, Chinese exporters of solar panelproducts have agreed to a voluntaryundertaking to adhere to minimum pric-ing requirements, as established by theCommission, for imports into the Euro-pean Union, whereby they commit tostop dumping and keep solar panels abovea certain minimum price level, or faceanti-dumping duties on EU imports at anaverage rate of 47.6%.

The agreed remedy (which remains pre-liminary – the European Commission hasuntil 5 December 2013 to finalise itsinvestigation and adopt definitive meas-ures) appears to have brought an end toone of the most significant anti-dumpinginvestigations conducted by the EU todate and averted, at least for the timebeing, a wider trade war between the EUand China with potentially far-reachingconsequences across several importantindustry sectors.

While some have breathed a sigh of reliefat the parties’ appetite to reach a concilia-tory and pragmatic solution, others haveviewed the Commission’s response as afrustrating nod to China’s ever-increasingpolitical clout, one which raises concernsfor the future of European manufacturingin the solar industry and beyond, andwhich calls for much soul-searchingwithin the EU as to its ability to promotea united front regarding future economicrelations with China going forward.

Legal Basis for anAnti-Dumping Investigation

European Union anti-dumping legis-lation, primarily Council Regulation

(EC) No. 1225/2009 of 30 November2009 (the ‘2009 Regulation’), providesthat the European Commission is legallyobliged to open an investigation where itreceives a valid complaint from a signifi-cant proportion of the affected Europeanindustry which provides evidence of harmas a result of products being dumped (thatis to say, exported for sale into the EUmarket at a price that is lower than that atwhich the same products are sold in thedomestic (in this case, Chinese) market) insuch a way as to cause material injury toEuropean Union industry. The Commis-sion is required to arrive at a final decisionas to the imposition of definitive measureswithin 15 months of the commencementof an investigation.

Following an investigation, anti-dumpingduties may be implemented if the follow-ing four elements are established:

• the products in question are in factbeing dumped on the EU market (asdetermined by Article 2 of the 2009Regulation);

• there is a material injury to EU indus-try (in that the imports have caused orthreaten to cause damage to a substan-tial part of the industry within theEU, such as loss of market share,reduced prices for producers andresulting pressure on factors such asproduction, sales, profits and produc-tivity);

• there is a causal link between thedumped imports and the injury; and

• community interest calls for interven-tion to prevent such an injury (such adetermination being made on thebasis of Article 21 of the 2009Regulation).

Background to theCommission’s Investigation

In July 2012, complaints were lodgedwith the European Commission, pursuantto Article 5 of the 2009 Regulation, bytwo industry associations, EU ProSun andEU ProSun Glass, on behalf of more than20 European producers of solarequipment. The complaints stated that






imports of Chinese-origin crystalline sili-con photovoltaic modules (that is to say,solar panels) and their key components arebeing dumped into the EU market. Theindustry associations set out their viewthat the Chinese government offersamounts equivalent to billions of Euros toChinese manufacturers in support of themanufacturing in and export from Chinaof solar panels, in a way that allows Chi-nese manufacturers to offer products fordumped prices over sustained periods at aprice very substantially lower than couldbe offered by their Europeancounterparts. China is the world’s largestproducer of solar panels, with approxi-mately 65% of all solar panels being pro-duced in China. Chinese manufacturersimported in the region of EUR 21 billionworth of solar panels into the EuropeanUnion during 2012, and are reported tocontrol approximately 80% of the solarpanel industry in Europe, making this oneof the most (if not the most) significantanti-dumping investigations handled bythe European Commission to date.

Following a preliminary analysis, theCommission established that the com-plainants had proved there was sufficientprima facie evidence to warrant the open-ing of an investigation, and announced,on 6 September 2012, that it had com-menced an investigation into the affectedmarket.

Six months into the investigation, on1 March 2013, the Commission publishedCommission Regulation (EU) No.182/2013, introducing registrationrequirements for solar panels and compo-nents imported into the EU from China.The purpose of these requirements was totrack all imports of Chinese origin goodsfalling within the affected tariff headings(namely, certain products classified undersubheadings 3818, 8501 and 8541 of theEU Customs Tariff) so that anti-dumpingduties, if subsequently introduced by theCommission, could be appliedretrospectively.

The Commission then published a furtherdecision on 4 June 2013, by way of

Commission Regulation (EU) No.513/2013, to impose provisional anti-dumping duties on the relevant products.This decision outlined the Commission’sdetailed methodology for conducting itsinvestigation and its conclusion that thefour requisite elements, as outlined above,were met. Consequently, the Commissionset a provisional duty rate of 11.8% onimports of the affected products into theEU, to run from 6 June 2013 to 5 August2013. This rate was to rise from 6 August2013 to an average rate of 47.6%, withvarious different rates assigned to certainspecifically listed Chinese manufacturers,rising up to a maximum anti-dumpingduty rate of 67.9%.

The Commission noted its willingness topursue discussions with the relevant Chi-nese manufacturers, in conjunction withthe Chinese Chamber of Commerce, inorder to try to reach a negotiated solutionthat would encourage the sale of productsat a price that would be acceptable for allparties, with a view to suspending theprovisional anti-dumping duties in theevent that such a solution were reached.

Initial Reaction andFurther Wrangling

In what was been perceived by some as aretaliatory gesture by the Chinese govern-ment in response to the Commission’sruling, China’s Minister of Commerceannounced on 1 July 2013 that China haddecided to conduct anti-dumping andanti-subsidy investigations into a numberof European industries.

First, China opened a dumping investiga-tion into European wine imported intoChina, raising concerns in particular fromthe French and other Mediterranean gov-ernments whose wine industries areincreasingly dependent on both exports toChinese consumers and Chinese invest-ment in European vineyards.

China also threatened to bring a separatecase against imports of luxury automo-biles, raising particular concerns amongstGerman manufacturers such as BMW,






Mercedes and Audi, which have enjoyedsignificant growth in China over recentyears, as well as among producers of otherluxury brands in Italy, Britain andelsewhere. China has also probed whetherto impose dumping duties on solar-gradepolysilicon imported from the UnitedStates, the European Union and SouthKorea.

At the same time, China engaged inlobbying campaigns directed at Europeanproducers who benefit from the supply ofcheap Chinese components, as well astowards individual member states, high-lighting the potential harm that might becaused to the European economy if theCommission were to levy dumping dutieson Chinese-origin solar products.

Mr De Gucht initially stood firm, empha-sising the importance of a united Euro-pean common trade policy and onceagain outlined his long-held view that thesubsidies offered by the Chinese govern-ment, coupled with China’s apparentintention to shut European traders out ofthe Chinese market by way of retaliatorydumping measures, would be seriouslydetrimental to European industries. How-ever, with several member states (and inparticular the German government,which has made considerable inroads inpromoting a Sino-German ‘special rela-tionship’ in recent years), speaking out inopposition to dumping duty rates whichthey perceived to be prohibitive (andpotentially damaging to broader traderelations), Mr De Gucht and the Com-mission appeared to accept that an alter-native solution would be required in orderto avoid the emergence of a more wide-ranging, tit-for-tat trade war that woulddetrimentally affect an already fragileEuropean economic landscape.

An ‘Amicable Solution’

As noted above, Mr De Gucht issued apress statement on 27 July 2013 explain-ing that the EU and China had negotiateda settlement that represented an ‘amicablesolution’ to both parties. This comprised

voluntary undertakings offered by Chi-nese exporting producers of solar panelsto accept minimum pricing thresholdswhen importing the affected products tothe European Union. Mr De Gucht didnot disclose the agreed minimum pricinglevels accepted by the Chinese exporters,although stated that a floor price ofaround 80 cents per watt peak capacity ofa solar panel, as had been advocated byEU ProSun, had not been entertained aspart of the discussions. A European Com-mission official was later reported to havecommented that the undertakings set aminimum price of between 55 and 57cents per watt, which applies to the firstseven gigawatts of capacity sold in the EU,beyond which the 47.6% duty rate willapply.

The European Commission approved thisdecision on 2 August 2013, by way ofCommission Decision 2013/423/EU andthe adoption of Commission Regulation(EU) No. 748/2013, which took effectfrom 6 August 2013. Pursuant to thisRegulation, Chinese exporters are exemptfrom anti-dumping duties if the followingfour criteria are met:

• a company specifically listed in theRegulation manufactured, shippedand invoiced directly the relevantproducts either to their related com-panies in the EU acting as an importeror to the first independent customeracting as an importer and clearing thegoods for free circulation in the EU;

• the imports are accompanied by acommercial invoice containing spe-cific information regarding theexporting company, the relevant prod-ucts and including a statement that thegoods are being imported in accord-ance with the terms of the undertak-ing offered by the company andaccepted by the European Commis-sion;

• the imports are accompanied by anExport Undertaking Certificate issuedby the China Chamber of Commercefor Import and Export of Machineryand Electronic Products, certifying






that goods are covered by the under-taking offered by the company andaccepted by the European Commis-sion; and

• the goods declared and presented tocustoms correspond precisely to thedescription on the undertakinginvoice.

Reception

Many European producers reacted to theCommission’s decision with distress, withEU ProSun stating that the 56 cent mini-mum pricing level represents the currentdumping price for Chinese components.By contrast, the average price of a solarpanel manufactured in Germany isreported to be 77 cents per way (as at July2013). EU ProSun has stated that it willpursue action before the European courtsagainst the agreement, on the basis that asuspension of anti-dumping measures isonly permissible under the 2009 Regula-tion where the minimum price isadequate to remove to injury caused bythe dumping to European industry – asituation which EU ProSun strongly feelshas not been achieved.

Meanwhile, it is possible that Chineseexporters may consider challenging cer-tain aspects of the EU measures before theEuropean courts, and in particular maytake issue with the Commission’s method-ology in determining the productsaffected by the investigation.

What this means is that although bothChina and the EU are keen to signal anend to this dispute, there is a very realpossibility that the issue of solar panelswill live on for some time through legalchallenges and further scrutiny in Luxem-bourg (even if it is possible that suchchallenges will be kept on hold pendingthe announcement of the Commission’sdefinitive findings in December).

The solar panel saga can be seen as auseful indicator of the balance of powerbetween the EU and China. It is clear thatthe two will remain extremely importantand interdependent trading partners for

the foreseeable future. At the same time,the threat of a broader EU-China tradewar continues to simmer. The EU hasasked the World Trade Organisation toexamine the legality of anti-dumpingduties adopted by China on imports ofEuropean stainless steel tubes, and is alsoinvestigating the supply of telephone net-work equipment into the EU by twoChinese producers. China has agreed tocease its investigation into imports ofEuropean wines but its investigation intoalleged dumping of automobiles continuesto hang over European producers. Andrecent times show that both the EU andChina are certainly not closed to thenotion of opening investigations intoother industry sectors, often at shortnotice, where it is deemed appropriate todo so.

In the recent build up to the latest discus-sions on China’s ongoing dispute withJapan over the Senkaku/Diaoyu islands,Chinese deputy foreign minister Li Bao-dong stated:

‘[a] meeting between leaders is not simplyfor the sake of shaking hands and takingpictures, but to resolve problems. If Japanwants to arrange a meeting to resolveproblems, they should stop with the emptytalk and doing stuff for show.’

Mr De Gucht will no doubt also takeheed from this message, and will beacutely aware of the levers available toChina in order to resolve problems inreaching an ‘amicable solution’ in anyfuture trade disputes – even if such asolution leaves a bad aftertaste for Euro-pean industry. In the meantime, Europeancompanies sourcing products or compo-nents from China or seeking to exporttheir goods to China should be vigilant ofthe significant financial consequences thatcould arise from the escalation of futuretrade defence measures being brought byeither party.

Mathew ButterDirector of M&R Tax Advis-ers Ltd






CUSTOMS

Halifax explained

When asked, in the 1960s, what hethought was the significance of the FrenchRevolution, an eminent Chinese historianis said to have replied that it was too earlyto tell. At a mere distance of seven yearsfrom the decision of the European Courtof Justice in the case of Halifax, the sameanswer seems appropriate. Since the initialshock, in the winter of 2006, at theintrusion into British tax jurisprudence ofthe truly alien concept that an arrange-ment might comply with the letter of thelaw but still be struck down, there hasbeen a steady process of judicial consid-eration, and even clarification, of whatwas really meant by that momentousdecision. With every passing year, itsmoment declines a little. No longer can itbe seen as the broad spectrum antibioticmuch desired by taxing authorities toneutralise the ingenuity of the accountantsand lawyers, and paper over the cracks ofpoor statutory drafting (‘you knew whatwe meant, even if we did not say it …’).The broadly expressed principles of theinitial judgment have been relentlesslyexplored and analysed by the UK Courts,which traditionally seek to use languagewith far greater precision and consistencythan their European counterparts. (Thiscomes from an historic need to read thewords of statutes with great care: after all,without any written constitution, theBritish have never had anything else towhich to refer.) The cases in which theUK Courts have pushed the ECJ to showits hand very fully on this issue have beenCadbury Schweppes (2006), Weald Leasing(2010), RBS GmbH (2010) and OceanFinance (2013). It is no accident that theUK has accounted for thrice as many ECJreferences than all the other MemberStates put together.

The recent Court of Appeal decision inPendragon v HMRC [2013] EWCA Civ868, can be seen as the fruit of thisprocess. (WHA, the only other Court ofAppeal case on the subject, came too early

(2006) to be of use (only Halifax itself hadthen been decided), and misfired recentlyin the Supreme Court (2013), which paidthe taxpayer the compliment of duckingthe Halifax issue.) By contrast, the Pen-dragon decision was able to harvest thecombined implications of the slew of ECJdecisions on abuse, and give authoritativeguidance.

The focus of the judgment was on thecorrect approach to the second limb ofthe two-stage Halifax test of whether anarrangement constituted an abuse of EUlaw. Stage one involves identifyingwhether the arrangement in questioninvolves a policy-offence to underlyingprinciples of EU VAT law, notwithstand-ing formal compliance with it. That issuewas left in the background. Stage twoinvolves deciding whether the essentialaim of the arrangement in question was toobtain a tax advantage. This latter pointemerged as the focus of the judgment. Itis to be stressed that the test is cumulative:both limbs must be activated, before anabuse can be found to exist.

It is unknown whether the Chinese histo-rian mentioned above could have saidwhen a used car was not a second-handcar for VAT purposes. Confucius wouldprobably have observed that a used car isnot a second-hand car in the absence of aprior sale to a private buyer. It wouldfollow that where a car has simply beenused for demonstrator purposes by the cardealer, it would not qualify for the under-lying purpose of the margin scheme,which is to mitigate the effects of histori-cally ‘trapped’ VAT on vehicles whichhave been the subject of transactionswhere input tax could not be deducted.Such was the argument on the first limbof Halifax in Pendragon. However, that wasnot how the UK margin scheme worked.KPMG had noted this and advised Pen-dragon that demonstrator cars could ben-efit from long standing UK legislationconcerning the desupply of cars, TOGCs,and transfers of vehicles subject to financ-ing transactions, so as to become marginvehicles on the occasion of their firstdisposal to private purchasers. As a result,






input tax could be reclaimed on theacquisition of the cars, but (given the lackof any profit margin in the hands of thefinal seller), no output tax would be dueon the sale. The UK legislation was lateramended, so the case had only historicsignificance – an advantage for thetaxpayer.

The taxpayer also had the advantage thatthe First Tier Tribunal made extensivefactual findings in its favour. The KPMGarrangement involved various in-housecompanies entering into, first, an intra-group sale of newly purchased cars(whereby output tax was paid, and a rightto reclaim input tax arose). Secondly (onthe same day), the cars were the subject ofan intra-group hybrid lease to dealerships.This generated a fully taxable incomestream. Step three involved the assignmentof the leases to a third-party bank (off-shore), by way of security for a substantialloan. At step four, the finance was thenrepaid and the hybrid leases assigned bythe third party lender to other groupcompanies by way of TOGC, (a non-supply). Finally, the cars were then sold toprivate buyers under the margin scheme.

It was agreed throughout the case that thearrangement ‘worked’ in UK law – pursu-ant to the complex provisions of Art 8 ofthe UK Cars Order SI 1997/1615 (readwith Art 5 of the Special ProvisionsOrder 1995, as it then stood), wherebythe last step fell within the margin schemeas a result of the status of the prior twosteps.

However, there was no doubt that as amatter of normal commercial practice cardealers needed large lines of finance andhad to give security for it. Therefore,those elements of the arrangement wereclearly normal commercial elements. Fur-ther, the price at which the various sup-plies were made, including the rate ofinterest charged for the loans, all survivedscrutiny: the worst that the Upper Tribu-nal could say as to the latter was that theloan was relatively expensive. However,the precise way in which that wasachieved, using captives, TOGCs etc, wasclearly tax driven.

Was that fatal? Did it engage the secondleg of Halifax? Agreeing with the FTT,and disagreeing with the Upper Tribunal,the Court of Appeal held that it was notabusive. It reviewed Halifax in the light ofthe later ECJ decisions, and concludedthat what mattered was the objectivecharacter of the transaction, rather thanthe motives of those involved, or theopinions of their advisers. It is good thatthis highly contentious area has now beenclarified. Much debate has stemmed fromthe ambiguous way that the ECJ hadstated the second limb of the two-stagetest, using the word ‘aim’, which suggeststhe (subjective) motive or purpose of theparties. From that misunderstanding, it isbut a short step to saying that any elementof a transaction that is ‘tax driven’ in termsof its inclusion or terms, is abusive. How-ever, closer examination of the wordingused (and of the remarks by the Advocate-General), shows that it is the aim of thetransaction that matters. How can a trans-action have an aim? The key, as the Courtof Appeal found, lies in the concept ofEuropean law that a transaction can havean inherent purpose or aim, ie the essen-tial objective function, which is independ-ent of the subjective motives of the parties.In other words, it is how the transactionmeasures up to normal commercialstandards. Thus, the aim or nature of thetransaction may be that it is designed tomake a profit by reason of furnishing asupply. In such a case, it is a normalcommercial operation, and can be thevehicle for delivering a tax advantage(eg RBS GmbH). Alternatively, it mightbe such as to have no inherent profitabil-ity, and indeed be abnormal in commer-cial terms (see eg Part Service), in whichcase it is simply not a transaction that acommercial operation would make. Insuch a case the only explanation for thetransaction was be as a piece in a game offiscal chess – rather than any kind ofcommercial step. This is not an easy dis-tinction to comprehend. But it containsthe most important aspect of this decision,which is the first case to grapple with suchpoints properly.






Commerciality is not to be confused withthe discredited defence of having a com-mercial effect – see the direct tax case law(eg Furniss v Dawson, et al.). The clue tocommerciality is to be found, first, in thewell-known check list of factors materialto finding abuse in Part Service and, sec-ondly, in such cases as Weald andRBS GmbH, in both of which clearlytax-driven elements were accepted asproper, but only so long as they werecarried out on normal commercial terms.Where they were not (ie the rate ofpayments in Weald), they were struckdown as abusive. This makes completesense: VAT is a tax on commercialtransactions. Halifax made clear that evenartificial transactions were still economicactivities. No value judgment was to bemade as to those. However, in making thevalue judgment for abuse purposes, onlythe objective nature of the transaction willbe material. Otherwise, two identicaltransactions might be treated differently,depending on the motives of the partiesor the advice received, which would notbe right. If motive and advisors’ opinionsare excluded, then there is only the objec-tive nature of the transaction.

Specifically, at paragraph 157, the Courtof Appeal grappled with the difficult ques-tion of sub-elements of an otherwisecommercial arrangement, which may beseen in isolation to be , ‘completely unneces-sary from an ordinary commercial point of view(as in Halifax itself, or inWHA) [whereas] inother cases the element in question may be oneof several possible ways of carrying out some-thing which would itself be a normal part of thearrangement … What would have been a nor-mal thing to be done may have been done in arelatively unusual way.’ It added, ‘Given thatparties are allowed to choose in what way theyorganise their affairs … it may be more difficultto treat such a step as abusive and artificial if itcan be regarded as no more than one of a

number of possible ways of carrying out a stagein the arrangements which is, in itself, normaland responsive to ordinary commercialconsiderations.’

This is an intellectually rigorous passage,which is addressing the differencebetween something that is merely tax-driven, but otherwise done on commer-cial terms, (which is acceptable) withsomething that is both tax-driven anduncommercial (which is abusive). The tra-ditional approach of the Commissionershas tended to elide the two. By ‘uncom-mercial’, is meant something done in away that no business person would do,eg there would be no profit, or no marketfor the product, the price makes no sense,etc.

In the background of the case, but notultimately featuring in the decision, wasthe concession that HMRC made to theSupreme Court in the course of theWHA litigation. This flows from the factthat the abuse doctrine is one of EU law:it does not exist in British law. It followsfrom this that, where the tax advantageonly arises from a UK statutory provision,which does not reflect EU VAT law prop-erly (eg is too generous), the abuse doc-trine cannot apply, since the advantage isof purely UK origin. This was debated inthe Supreme Court in WHA, andHMRC publically maintained theconcession. It is understood that it recon-sidered the concession in the course ofPendragon, but stated that did not seek towithdraw it. It is clearly of the greatestimportance for taxpayers to know theprecise position on this point. No doubt apublic notice setting out the precisenature of the concession is being draftedby HMRC.

David ScoreyEssex Court Chambers






CONTRIBUTORSDavid Rudling and Alan DoltonLexisNexis

John DavisonIndependent Indirect tax consultant

Oliver Jarratt, Amy Bache & CandiceWalkerDeloitte LLP

Graham C Brearley LLB(Hons)Grant Thornton UK LLP

Matthew ButterDirector of M&R Tax Advisers Ltd

David ScoreyEssex Court Chambers

Subscription enquiriesLexisNexis Customer ServicesTel: +44 (0)84 5370 1234Email: [email protected]

EXECUTIVE EDITOR

Marc WelbyBDO LLP

Assistant Editors

Graham ElliottWithers Worldwide

John DavisonIndependent Indirect Taxconsultant

SPECIALIST EDITOR

Giles SalmondDeloitte LLP

Editorial enquiriesHalsbury House35 Chancery LaneLondon WC2A 1ELCommissioning:Tanya CampbellTechnical: David RudlingProduction:Tanya Campbell

The data contained in this publication is intended to be a general guideand cannot be a substitute for professional advice. Neither the author(s)nor the publisher accept responsibility for loss occassioned to any personacting or refraining from acting as a result of material contained in thispublication. This is a Butterworths’ publication.

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