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Indirect Tax Update for week ending 12 June 2015
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Indirect Tax Update 18/2015
1.
© 2015 Grant
Thornton UK LLP. All rights reserved. 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. Issue18/2015 Pendragon VAT scheme 'an abuse of law' Indirect Tax Update
2.
© 2015 Grant
Thornton UK LLP. All rights reserved. ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton UK LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. 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. grant-thornton.co.uk 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 stuart.brodie@uk.gt.com (0)14 1223 0683 Karen Robb London & South East karen.robb@uk.gt.com (0)20 772 82556 Richard Gilroy London & South East richard.gilroy@uk.gt.com (0)20 7728 3170
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