The Attorney General of the European Court of Justice has found in favour of the United Kingdom’s Customs & Excise department in a case where three companies were accused of abusing the VAT system to avoid paying tax.
The case in question examined whether transactions undertaken by the banking group Halifax, private medical firm BUPA and the University of Huddersfield, which Customs deemed had no economic purpose other than to reduce VAT liability, can qualify as supplies made in the course of economic activities for VAT purposes.
Siding with Customs, Attorney General Miguel Poiares Maduro commented: “Tax law should not become a sort of legal ‘wild-west’ in which virtually every sort of opportunistic behaviour has to be tolerated so long as it conforms with a strict formalistic interpretation of the relevant tax provisions and the legislature has not expressly taken measures to prevent such behaviour.”
The UK Government currently estimates that £3 billion in revenues are lost annually as a result of VAT abuse.
However, Kendra Hann, indirect tax partner at accounting firm Deloitte observed that while the decision is a significant victory for the UK government, it should not prevent firms from using legitimate means to lessen their tax burden.
“This is a test case and although Customs will be pleased to receive the opinion, the AG also confirmed, ‘there is no obligation to run a business in such a way as to maximise tax revenue for the State. The basic principle is that of the freedom to opt for the least taxed route to conduct business in order to minimise costs’,” Hann stated.
France, Italy, The Netherlands and Ireland have intervened in support of the UK. The EU Commission has also issued support to the UK, although qualifying this with a warning that the ECJ should be careful not to restrict the activities of innocent traders.
The ECJ is expected to reach its decision in the summer of 2005, but normally follows the opinion of the Attorney-General.
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