The Halifax judgment handed down on 21 February establishes in UK
VAT law the principle of an ‘abuse of rights’, that where a tax arrangement is
set up with the essential aim of avoiding tax, it will not be effective for tax
Some advisers doubt how far the judgment actually goes, while HM Revenue
& Customs has said on the record that it wishes to push the principle as far
as possible, potentially across the range of taxes.
The case, more than anything, is set to cause uncertainty in the minds of
businesses and deter them from entering into tax planning that may come within
The case, or rather the series of cases, decided by the European Court of
Justice (ECJ) related to complex tax arrangements. Halifax had set up a series
of companies designed to reclaim VAT, which it would not normally be able to
There were two other cases put before the court testing the same principle.
In the first case, involving BUPA, the private medical supplier had
anticipated a change in the law regarding its reclaim of VAT that would have
meant it paid a higher rate. It entered into an arrangement with a subsidiary
that, for invoicing purposes, pushed through orders of supplies on a certain
date, even if the goods did not arrive until later. To do so, its subsidiary,
Goldsborough Developments, took on a loan worth seven times its turnover, to
place an order for drugs that would last between 50 and 100 years.
A second case involved the University of Huddersfield, which had set up a
trust to refurbish two mills that it owned in Huddersfield. The trusts could
claim VAT advantages that it, as a university, could not.
HMRC had tried to pursue two different arguments in relation to the cases.
The first alleged that, since the activities were entered into for avoidance of
tax and not for any legitimate business purpose, they did not, therefore,
constitute ‘economic activity’.
EU VAT directives require an economic activity to have occurred for VAT to be
reclaimable, so the ECJ rejected HMRC’s argument. It said that an ‘economic
activity’ must be objective in nature. It cannot be a question of the intention
or purpose of a transaction.
Introducing such a subjective principle would undermine the basis of the VAT
directives, it said, frustrating the need for certainty. It concluded: “The fact
remains that the question whether a given transaction is carried out for the
sole purpose of obtaining a tax advantage is entirely irrelevant in determining
whether it constitutes a supply of goods or services and an economic activity.”
But the ECJ did accept HMRC’s second argument, that the arrangements could be
frustrated in that they were an abuse of rights. The principle of an abuse of
rights had been developed in relation to an Austrian taxpayer, who had been
exporting powdered milk to obtain an export subsidy, then re-importing it and
paying a lower tariff on the goods.
In the Halifax cases, too, the court held that an abuse of rights
principle did exist in community law. It expressed it as follows: “For it to be
found that an abusive practice exists, it is necessary, first, that the
transactions concerned, notwithstanding formal application of the conditions
laid down by the relevant provisions of the Sixth Directive and of national
legislation transposing it, result in the accrual of a tax advantage, the grant
of which would be contrary to the purpose of those provisions.
Second, it must also be apparent from a number of objective factors that the
essential aim of the transactions concerned is to obtain a tax advantage.”
The national courts would have to decide, paying heed to the question of what
the transactions were essentially about, and what their real substance and
The cases themselves are likely to now return to the UK courts to establish
facts and other issues, while the principle established by the ECJ in relation
to them has already been enthusiastically embraced by HMRC.
The department issued a statement on the cases at the end of February, saying
that there were around 175 cases pending the ECJ judgment. They are being held
over until 22 April, 60 days after the judgment was issued, and both the tax
authorities and taxpayers are using the time to consider how to proceed.
Far reaching judgment
HMRC would also like to push the judgment as far as it would go. In an
interview with Financial Director’s sister magazine Accountancy Age in
October, Dave Hartnett, director general of HMRC, strongly hinted that the case
could be used more widely. “We will certainly be looking at the potential scope
of using abuse of law arguments if the court confirms the view,” he said.
Advisers have not known exactly which emphasis of the judgment to take most
The strong defence of the argument that avoidance activities constitute
economic activities has encouraged some. Advisers at Grant Thornton have
suggested it means that “tax authorities can attack VAT avoidance using an
‘abuse’ doctrine, but only if it would offend the underlying policy of the
legislation to give the business the benefit”.
Derek Allen, director of taxation at ICAS, focused on the fact that the court
was suggesting tax arrangements could now be judged purposively. “Clearly, there
is nothing unlawful about tax avoidance, but this verdict seems to me to judge
the motivations behind setting up avoidance schemes,” he said.
Whatever the exact meaning of the judgment, it is clear that it will create
confusion, a win, in other words, for HMRC.
As Penny Hamilton, an indirect tax barrister, said: “This creates
uncertainty. Businesses like certainty.”