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ITU 37/2014
- 1. Indirect Tax Update for week ending 10 October 2014
After what seems to have been an eternity, the Upper Tribunal has finally decided that a VAT mitigation scheme employed by the University of Huddersfield was, in an EU VAT law sense, 'abusive'. After almost two decades of legal wrangling, a lease and leaseback scheme that was designed to provide a partly exempt business with an enhanced input tax recovery has been found not to be effective.
The Upper Tribunal has issued its judgment in the case of the University of Huddersfield. It has taken almost two decades for this issue to be resolved and, even now, it is possible (although unlikely) for the University to seek leave to appeal. In simple terms, the University β a heavily partially exempt organisation β wished to refurbish a building in Huddersfield at a cost of approximately Β£4.1 million including VAT of Β£612K. If it had done nothing, a very large proportion of the VAT chargeable on the works would not have been reclaimable. To mitigate that cost, the University set up a lease and leaseback arrangement with a subsidiary company and both the University and the subsidiary 'opted to tax' their respective interests. At the time, (1996), this meant that both entities made taxable supplies (charging taxable rent to each other under the head and sub leases) which entitled the University to reclaim the VAT incurred on the refurbishment costs. Not surprisingly, HMRC took the view that, as the University was a heavily partially exempt entity, it was not entitled to reclaim the input VAT in full.
The Court of Justice then issued a judgment in 2006 (known as the 'Halifax' judgment) concerning the issue of 'abuse of rights'. The court found that where a taxpayer puts arrangements in place which result in a tax advantage contrary to the purpose of EU VAT law and, when looking at the facts objectively it is found that the essential aim of the arrangements is to obtain that advantage, this will be construed as an abuse of EU law rights.
Following the 'Halifax' judgment, the Upper Tribunal has allowed HMRC's appeal confirming that the arrangements put in place by the University β arrangements which, essentially, allowed an entity which made exempt supplies of education to claim back input tax which it would ordinarily have been unable to reclaim β were abusive.
Comment β The University accepted that the second 'Halifax' test β whether the essential aim of the arrangements were to obtain a tax advantage β had been met so the only issue to resolve was whether the advantage sought was contrary to the purpose of the EU law in question. The Upper Tribunal had no doubt that EU VAT law does not permit VAT to be claimed by an entity which predominantly supplies goods or services that are exempt from VAT. As a result it found that the first 'Halifax' test had also been met. Post the CJEU's 'Halifax judgment, the result in the University's case was probably never in doubt but it has taken a [very] long time to reach that conclusion.
For further information in relation to any of the issues highlighted in this Indirect Tax Update please contact: London/South East Karen Robb karen.robb@uk.gt.com The Regions Stuart Brodie stuart.brodie@uk.gt.com The Midlands Mike Sheppard mike.sheppard@uk.gt.com
Β© 2014 Grant Thornton UK LLP All rights reserved βGrant Thorntonβ means Grant Thornton UK LLP, a limited liability partnership Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another's acts or omissions. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication.
www.grant-thornton.co.uk
Indirect Tax Update 37/2014
![Indirect Tax Update for week ending 10 October 2014
After what seems to have been an eternity, the Upper Tribunal has finally decided that a VAT mitigation scheme employed by the University of Huddersfield was, in an EU VAT law sense, 'abusive'. After almost two decades of legal wrangling, a lease and leaseback scheme that was designed to provide a partly exempt business with an enhanced input tax recovery has been found not to be effective.
The Upper Tribunal has issued its judgment in the case of the University of Huddersfield. It has taken almost two decades for this issue to be resolved and, even now, it is possible (although unlikely) for the University to seek leave to appeal. In simple terms, the University β a heavily partially exempt organisation β wished to refurbish a building in Huddersfield at a cost of approximately Β£4.1 million including VAT of Β£612K. If it had done nothing, a very large proportion of the VAT chargeable on the works would not have been reclaimable. To mitigate that cost, the University set up a lease and leaseback arrangement with a subsidiary company and both the University and the subsidiary 'opted to tax' their respective interests. At the time, (1996), this meant that both entities made taxable supplies (charging taxable rent to each other under the head and sub leases) which entitled the University to reclaim the VAT incurred on the refurbishment costs. Not surprisingly, HMRC took the view that, as the University was a heavily partially exempt entity, it was not entitled to reclaim the input VAT in full.
The Court of Justice then issued a judgment in 2006 (known as the 'Halifax' judgment) concerning the issue of 'abuse of rights'. The court found that where a taxpayer puts arrangements in place which result in a tax advantage contrary to the purpose of EU VAT law and, when looking at the facts objectively it is found that the essential aim of the arrangements is to obtain that advantage, this will be construed as an abuse of EU law rights.
Following the 'Halifax' judgment, the Upper Tribunal has allowed HMRC's appeal confirming that the arrangements put in place by the University β arrangements which, essentially, allowed an entity which made exempt supplies of education to claim back input tax which it would ordinarily have been unable to reclaim β were abusive.
Comment β The University accepted that the second 'Halifax' test β whether the essential aim of the arrangements were to obtain a tax advantage β had been met so the only issue to resolve was whether the advantage sought was contrary to the purpose of the EU law in question. The Upper Tribunal had no doubt that EU VAT law does not permit VAT to be claimed by an entity which predominantly supplies goods or services that are exempt from VAT. As a result it found that the first 'Halifax' test had also been met. Post the CJEU's 'Halifax judgment, the result in the University's case was probably never in doubt but it has taken a [very] long time to reach that conclusion.
For further information in relation to any of the issues highlighted in this Indirect Tax Update please contact: London/South East Karen Robb karen.robb@uk.gt.com The Regions Stuart Brodie stuart.brodie@uk.gt.com The Midlands Mike Sheppard mike.sheppard@uk.gt.com
Β© 2014 Grant Thornton UK LLP All rights reserved βGrant Thorntonβ means Grant Thornton UK LLP, a limited liability partnership Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another's acts or omissions. This publication has been prepared only as a guide. No responsibility can be accepted by us for loss occasioned to any person acting or refraining from acting as a result of any material in this publication.
www.grant-thornton.co.uk
Indirect Tax Update 37/2014](https://image.slidesharecdn.com/itu372014-141028053607-conversion-gate01/85/ITU-37-2014-1-320.jpg)
