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ITU Summary A major victory for HMRC in its
fight against perceived VAT
avoidance schemes. The Supreme
Court has allowed HMRC's
appeal in the long running
Pendragon plc VAT avoidance
case. In a unanimous judgment,
the Supreme Court has
confirmed that the scheme
entered into by Pendragon was
an abuse of EU law as it was
contrary to the purpose of the
VAT Directive.
The First-tier Tribunal has also
released a number of interesting
decisions this week. The first
concerns whether motor homes
should be regarded as caravans
and benefit from being zero-
rated, another relates to whether
the transfer of an 'opted'
property qualified as the transfer
of a business as a going concern.
16 June 2015
Supreme Court allows HMRC's appeal
The UK's Supreme Court has issued its judgment in this long running case relating to
whether a scheme entered into by motor retailer Pendragon plc was 'abusive'.
Overturning the judgment of the Court of Appeal, in a unanimous judgment, the
Supreme Court has ruled that the scheme was an abuse of law and that, as a
consequence, the transactions giving rise to a significant tax saving must be redefined.
Abuse of law – a concept derived from civil law jurisprudence - confines the exercise
of legal rights to the purpose for which they exist and precludes their use for a
collateral purpose. The effect of the arrangement was to enable Pendragon to sell
demonstrator cars second hand under the margin scheme even though VAT had been
reclaimed in full on the purchase price. This was not the intention or purpose of the
VAT law contained in the VAT Directive. While it was accepted that the scheme
worked from a technical perspective, the Supreme Court held – using the two stage
test established in the 'Halifax' case - that the result was contrary to the purpose of the
Directive and that the essential aim of the transactions was to obtain a tax advantage.
In 2009, the First-tier Tribunal had ruled that the scheme was not 'abusive' as the
'essential aim' of the transactions was for the Pendragon group to obtain loan finance.
This decision was overturned by the Upper Tribunal in 2012 but, on appeal, The Court
of Appeal restored the First-tier Tribunal's decision. The Supreme Court has ruled that
the First-tier Tribunal's conclusions on the 'essential aim' limb of the Halifax test was
wrong in law. Lord Sumption concluded that the scheme operated by Pendragon was
an abuse of law. In such cases. it is necessary for the scheme (or at least the abusive
elements of the scheme) to be redefined so as to re-establish the situation that would
have prevailed in the absence of the transactions constituting the abusive practice and
to deprive the taxpayer of the illegitimate advantage of paying VAT only on their profit
margin on the resale of cars to consumers.
Comment – There is a fine dividing line between putting arrangements in place for a
commercial reason and putting such arrangements in place for the purposes of seeking
a tax advantage. In this case, the Supreme Court did not accept that the main reason
was to enable the group to obtain finance but concluded that the main reason was to
obtain a very substantial tax advantage. As such, the scheme was abusive.
Issu
e 1
8/2
015
Pendragon VAT scheme 'an abuse of
law'
Indirect Tax Update
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GRT100456
First-tier Tribunal
Is a motor home a caravan?
In Oak Tree Motor Homes Ltd, the Tribunal was asked to consider whether the Appellant's sales of
certain motor homes should have been subject to the zero-rate of VAT applicable to caravans over a
certain size. The appellant made a claim for output tax of £1,181,480.53 (plus applicable interest) in
respect of sales of certain motor homes made during the claim period. HMRC rejected the Claims on
the basis that the Appellant’s supplies of motor homes were standard-rated.
For VAT purposes, HMRC uses the definition of a caravan contained in the Caravan Sites and
Control of Development Act 1960 which states that a caravan includes any motor vehicle that has
been designed or adapted for human habitation which is capable of being moved from one place to
another (whether by being towed, or by being transported on a motor vehicle or trailer). The
Appellant relied on this definition and argued that its sale of motor homes over a certain size should
have been zero-rated. The Tribunal considered that a motor home may very well contain all the
same living facilities as its non-motorised cousins, but the fact of the matter is that a motor home
differs from its cousins in a very important respect, namely the ability to move under its own power.
As such, it could see no reason founded in either domestic UK law or EU law principles for
disregarding this important distinction simply because both types of vehicle can be used for
residential purposes. The appeal was dismissed.
Comment
The 1960 Act
definition of a caravan
used by HMRC clearly
applies to 'motor
vehicles' designed or
adapted for human
inhabitation. However,
the Tribunal was not
persuaded by the
Appellant's arguments
and decided that, for
VAT purposes, a
caravan does not
include a vehicle which
is capable of moving
under its own power
First-tier Tribunal
Comment
The transfer of
property is a highly
complex area of VAT
law and there are rules
that must be followed
for a transaction to
amount to a transfer of
a going concern.
In cases where the rules
are followed, properties
can be transferred on a
VAT free basis.
However, the rules are
strict and failure to
comply can, as in this
case, lead to a hefty
VAT bill.
Transfer of a going concern?
In the case of Nora Harris, the issue was whether the transfer of a property as part of the transfer of
a business from Mrs Harris to her daughter constituted a transfer of a going concern for VAT
purposes. The taxpayer wished to refurbish a commercial property that she owned and let to tenants
and, in order to recover the VAT incurred on the refurbishment costs had 'opted to tax' the property.
Some time after, Mrs Harris transferred the business to her daughter and treated the transfer as a
transfer of a going concern.
Unfortunately, the daughter did not opt to tax, nor did she notify HMRC of any such option to tax
before the date of legal completion. As a consequence, HMRC argued that as these conditions were
not met, the transfer of the property was not to be treated as the transfer of a going concern.
The Tribunal agreed with HMRC. The rules contained within the VAT Special Provisions Order
were clear. Unless the purchaser opts to tax AND notifies the option to HMRC before legal
completion, unlike other assets being transferred, the transfer of the property cannot be ignored for
VAT purposes. As the property was not part of the transfer for VAT purposes, HMRC was right to
assess for VAT due on its value at the time of transfer.
Contact Stuart Brodie Scotland [email protected] (0)14 1223 0683
Karen Robb London & South East [email protected] (0)20 772 82556
Richard Gilroy London & South East [email protected] (0)20 7728 3170
