In the combined cases of Halifax, BUPA and University of Huddersfield the Advocate General (AG) has issued his opinion in favour of Customs saying that arrangements which have the sole intention of obtaining a VAT advantage are an abuse of the tax system.

The UK government is hoping that the European Court of Justice (ECJ) will set a precedent that may be applied to other taxpayers who enter into what the government perceives to be unacceptable VAT planning.

Kendra Hann, indirect tax partner at Deloitte said: “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’.”

The ECJ’s decision will impact many other cases currently going through the courts. The AG commented that “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”

Hann said: “Customs have made it clear that they believe tax avoidance is a serious drain on tax revenues, but until now it has been unlikely that the ECJ would provide the solution that Customs hope for.

“The UK Government currently estimates the revenue lost due to VAT avoidance is £3 billion.”

France, Italy, The Netherlands and Ireland have intervened in support of the UK, as part of the ECJ’s procedure where it considers both written and oral submissions before the Advocate-General gives his opinion and the Court finally gives its joint decision. The EU Commission has partly supported the UK, but has said that the ECJ needs to be careful in how this issue is dealt with, to ensure that it does not adversely affect innocent traders who are involved in such arrangements.

Ends

Notes to editor
The combined case is being heard by 13 judges, where normally only five judges sit, so this indicates how seriously the Court takes this issue. The court is expected to reach its decision in Summer 2005. Please see below broad outline terms for each specific case, heard in a joint hearing on 23rd November 2004:

Halifax Plc (an exempt bank) sought to recover otherwise large irrecoverable input tax on the construction of call centres by using a series of companies inserted between the builders and Halifax.

BUPA (an exempt private hospital) sought to recover otherwise irrecoverable input tax on drugs and prostheses by making a large pre-payment (£100m plus) to an associated company for the future delivery of these goods to its patients.

Huddersfield (an exempt university) sought to recover the otherwise largely irrecoverable input tax on the refurbishment of two derelict buildings by using a lease and lease-back arrangement.

The ECJ’s Advocate General was asked to opine on two main issues:
(i) The first issue that was considered was whether, in the relevant circumstances, transactions that are procured with the sole intention of achieving a tax advantage and which have no independent business purposes can qualify as supplies made in the course of economic activities for VAT purposes.
(ii) The second issue that was addressed was whether, in situations whereby a taxpayer seeks to abusively manipulate the VAT system to achieve a tax advantage, the Abuse of Rights doctrine is applicable and can thus be used to prohibit the recovery of input tax.

About Deloitte
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