ECJ VAT Ruling Represents Partial Victory For UK Government

by Ulrika Lomas, for LawAndTax-News.com, Brussels

23 February 2006

Ruling on Tuesday with regard to two long-contested VAT avoidance schemes in the United Kingdom, the European Court of Justice stated that the Sixth VAT Directive does not grant a taxable entity the right to deduct input VAT where the transactions from which that right derives constitute an abusive practice.

The ruling was delivered in relation to a scheme by the Halifax Building Society (now part of the Bank of Scotland group) and the University of Huddersfield to avoid VAT on the construction of call centres by creating intermediaries for the sole purpose of reclaiming more VAT than they were entitled to, and separately to an attempt by private healthcare provider, BUPA, to avoid tougher VAT rules by bringing forward orders for certain medicines and prostheses.

In a statement accompanying delivery of its verdict, the ECJ explained that the case had come before it because:

"BUPA, Halifax and the University of Huddersfield applied for repayment of or relief from input VAT on their transactions. The applications were rejected by the Commissioners of Customs & Excise. The latter concluded that a transaction, of whatever nature, carried out with the sole aim of avoiding VAT, is not in itself either a ‘supply of goods’ or a ‘supply of services’, nor a measure adopted in the context of an ‘economic activity’ for VAT purposes."

"The applicants challenged the Commissioners’ refusal before the English courts, which have asked the Court of Justice of the European Communities to interpret certain provisions of the Sixth VAT Directive."

The decision represents a partial victory for the UK authorities, who had reportedly been hoping that the ECJ would go further than its advocate general, Miguel Poiares Maduro, in condemning such 'abusive' transactions.

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