Tax Advisor 2010 tax avoidance case law review - Olswang

The Advocate General agreed with the taxpayer that it was free to decide whether to purchase or
lease goods, even where its reason for doing so was to reduce irrecoverable VAT. This was not
contrary to the VAT Directive. However, the Advocate General decided that it was an abusive
practice for a taxpayer to interpose an unconnected company in a series of leases in order to
prevent a direction that the lease should be treated for VAT purposes as having a market value
rent. The redefinition which was needed to remedy this abuse was to ignore the third party and
impute a market value lease between the two connected companies.
If the ECJ agrees with the Advocate General then this will be a victory in part for both HMRC and
the taxpayer. The reasoning of the Advocate General is highly persuasive. Taxpayers should be
free to choose the form of transactions they undertake, but wholly artificial elements included in
those transactions to achieve a VAT saving are abusive.
CONCLUSIONS
2010 has seen the courts developing and refining the Ramsay principle. The courts continue to
be hostile to artificial schemes, and appear unlikely to accept any scheme in which a taxpayer
seeks to create a loss artificially where it has not made an economic loss. Taxpayers cannot
escape this conclusion by artificially including within the scheme a slim possibility that the scheme
will not proceed as planned.
The limitations of Halifax have also been explored, and both HMRC and the taxpayer have had
successes. Taxpayers cannot implement wholly artificial schemes without them being redefined,
but that redefinition cannot work only in HMRC’s favour. Equally, if taxpayers make commercial
decisions to operate their business in a different manner, and accept the commercial
consequences of those decisions, then Halifax should not come into play, even where these
commercial decisions are motivated by the VAT savings which will be achieved.
2011 is shaping up to be a bumper year for tax avoidance cases. We await the decision of the
Supreme Court in DCC Holdings v Revenue and Customs Commissioners [2010] STC 80 with
interest. It should help clarify whether a purposive interpretation of legislation can be adopted
even where the legislation in question contains complex and precisely detailed rules on how repo
transactions should be taxed. The Court of Appeal in Mayes v Revenue and Customs
Commissioners [2010] STC 1 will consider a similar question: can you apply a purposive
interpretation to part of a piece of legislation for which no discernable overarching purpose can be
determined? Finally, in the Tower MCashback LLP1 v Revenue and Customs Commissioners
[2010] STC 809 case, the Supreme Court (sitting as a panel of seven) will revisit its decision in
BMBF v Mawson [2005] STC 1 to consider in what circumstances a taxpayer can argue it has
made a “payment” for capital allowances purposes, when the monies used in making the
payment appear to go round in a circle, beginning and ending with the same party.
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