HMRC Comments On ECJ VAT Case

by Amanda Banks, Tax-News.com, London

01 March 2006

The UK's Revenue and Customs (HMRC) has released its comments on the recent European Court Of Justice rulings in re the University of Huddersfield, BUPA Hospitals Limited and Halifax plc.

HMRC summarizes the litigation as follows:

'All three cases concerned artificial VAT avoidance schemes. In Halifax the taxpayer wished to avoid suffering irrecoverable VAT on the construction of new call centres for use in its banking business. In BUPA the taxpayer wished to avoid suffering irrecoverable VAT on the purchase of drugs for use in its healthcare business. In Huddersfield the taxpayer wished to avoid suffering irrecoverable VAT when it refurbished a derelict mill for use in its educational activities. In all three cases the contractual arrangements were changed from what they would otherwise have been in order to avoid the incidence of irrecoverable VAT.

'HMRC argued that the new transactions were wholly artificial, and did not rank either as supplies, or as part of any economic activity, for VAT purposes. As a consequence the avoidance schemes failed. HMRC also argued that the artificial arrangements were an abuse of right. As a consequence, HMRC maintained, the advantage sought by the taxpayers should be denied and, again, the schemes should fail.

'In all three cases the taxpayers argued that each contractual transaction was a supply in the course of an economic activity for VAT purposes; that the contracts were real and genuine as a matter of contract law; and that it was irrelevant whether they had any economic purpose apart from the purpose of avoiding VAT. They further argued that the EC principle of abuse of right had no application to VAT, particularly where the taxpayer relied on the UK legislation rather than on the direct effect of the EC VAT Directives.

The ECJ has decided that, while artificial avoidance transactions can be supplies made in the course of an economic activity, they do not give rise to a VAT advantage, because the EC principle of abuse prevents this. In addition the BUPA scheme failed on technical grounds.

HMRC says that there are about 175 cases currently stood over pending the ECJ's decisions, most of them for 60 days after the date of the decision, (i.e. until 22 April 2006). The Commissioners will use this period to review the disputed decisions in individual appeals in the light of the ECJ's judgments but, says HMRC, 'given the terms of those judgments they anticipate the vast majority of disputed decisions will be maintained.'

HMRC advises appellants to use this intervening period to consider how they wish to proceed. Since all of these cases are within the judicial appeal system, HMRC will correspond with Appellants via their solicitor/representative of record.

Recommended