ECJ Hands UK Partial Victory In VAT Abuse Case

by Amanda Banks, Tax-News.com, London

22 February 2006

The European Court of Justice has found in favour of the United Kingdom government in a case where three companies were accused of abusing the VAT system to avoid paying tax, although disappointingly for the UK tax authorities, the judges stopped short of ruling the schemes in question to be tax evasion.

The case centred on Halifax, a banking institution, and the University of Huddersfield, whose services were largely exempt from VAT, but which had devised schemes enabling them, through a series of transactions involving different companies or organisations, to recover in practice all the input VAT paid in respect of construction works.

Also involved in the case was BUPA, a UK-based company which manages a large number of private hospitals, and which had attempted to arrange payments for contracts with other companies in the same group for the future supply of drugs and prostheses before delivery in order to benefit from a much more favourable VAT regime.

As a result, Halifax requested a GBP7 million tax refund, BUPA wanted to deduct GBP35 million from its tax bill and The University of Huddersfield claimed a GBP612,500 tax deduction - requests which were rejected by tax authorities.

The ECJ held that, where an abusive practice has been found to exist, the transactions concerned must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.

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