Whether a VAT planning scheme was an abuse of law

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Summary
Over the decades since the
introduction of VAT, a number of
principles of EU law have emerged.
These include the principles of fiscal
neutrality, legal certainty,
proportionality, legitimate
expectation and abuse of law.
None of these principles are written
down but they have developed over
many years of the Court of Justice
jurisprudence.
It is in relation to the latter principle
that the University of Huddersfield
found itself in a 20 year battle with
HMRC. The Court of Appeal has
now issued a judgment confirming
that the principle of abuse of law
applied to a VAT planning
arrangement implemented by the
University which gave it a VAT
advantage contrary to the purpose
of the VAT Directive.
17 May 2016
Court of Appeal
The Court of Appeal has released its judgment in the University of Huddersfield VAT
case. The question to be resolved in this long-running case was whether a VAT
planning scheme implemented by the university fell foul of the EU law principle of
abuse of law. The university had purchased an old mill in Huddersfield which needed to
be substantially refurbished. Without anything further, the VAT payable on the
refurbishment works would not have been claimable in full as the university intended to
use the refurbished building for the purpose of an exempt activity (the provision of
university education). Having sought advice, the university implemented a VAT saving
scheme.
The scheme involved the establishment of a trust and an in-house construction
company. It was found by the First-tier Tax Tribunal that the sole purpose of
establishing the trust was to facilitate the VAT planning scheme and the issue for the
Court of Appeal was whether the scheme provided a VAT advantage to the university
which was contrary to the purpose of the VAT Directive. Although the First-tier Tax
Tribunal considered that the arrangements were not abusive, the Upper Tribunal (on
appeal) and now the Court of Appeal have found that the First-tier's conclusions were
wrong. The Court of Appeal concluded that the purpose of the Directive was to ensure
that taxpayers that make exempt supplies do not recover VAT which they are not
entitled to reclaim. Clearly, the VAT planning arrangement implemented by the
university put it in a position where, even though the building was to be used for the
provision of exempt education, it had recovered all of the VAT incurred on the
refurbishment works. The Court of Appeal decided that this was contrary to the
purpose of the Directive and, accordingly the scheme constituted an abuse of law.
Comment – at the time that this scheme was implemented (1996), this kind of
VAT planning was fairly commonplace. It is only with the emergence of the EU
law principles, including the principle of abuse of law, that HMRC began to
challenge such arrangements. However, in light of these now established
principles, arrangements regarded by HMRC as artificial which provide a tax
advantage contrary to the Directive's purpose are likely to be challenged by
HMRC and dismissed by the courts.
University of Huddersfield
Case Alert
Contact
Stuart Brodie Scotland stuart.brodie@uk.gt.com (0)14 1223 0683
Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556