UK and International Tax news

AG Opinion In Weald Leasing

Friday 29th October 2010

The ECJ has recently released the Advocate General’s (AG’s) opinion in the case of HMRC v Weald Leasing [C-103/09].  The case concerns a structure whereby the taxpayer group bought assets and leased them to an unconnected company. This third party leased the assets back to another member of the group which had a 1% VAT recovery, adding a small uplift. The leases were for a longer period than would normally be available in the open market. This provided a cash flow benefit of spreading the cost of irrecoverable VAT over a ten year period rather than incurring effectively the full amount of irrecoverable VAT up front.

The AG has proposed that the ECJ should answer the questions referred by the Court of Appeal (England and Wales) as follows:

(a)    The adoption of an asset leasing structure involving an unrelated third party or a wholly owned subsidiary which is independently registered for VAT by a largely exempt trader instead of purchasing assets outright in order to defer the payment of irrecoverable tax does not in itself give rise to a tax advantage which is contrary to the purpose of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes.

(b)    The use of a purely artificial structure essentially designed in order to gain a tax advantage by preventing tax authorities from directing in accordance with the provisions of national law adopted in full compliance with Sixth Directive 77/388 that the value of leasing arrangements between connected persons be taken to be their open market value is an abusive practice.

(c)    Where an abusive practice has been found to exist, the transactions involved must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice. Where a purely artificial structure is adopted in leasing arrangements essentially in order to prevent tax authorities from directing that the value of those arrangements between connected persons be taken to be their open market value, those arrangements should be redefined by ignoring the presence of that structure.

(d)    The concept of ‘normal commercial operations’ in the context of value added tax abuse is unrelated to the operations a taxpayer typically or habitually engages in. An assessment of whether a transaction is carried out in the context of ‘normal commercial operations’ refers to the nature of the transaction or scheme in question and whether it is a purely artificial construct established essentially in order to obtain a tax advantage rather than for other commercial reasons. The links of a legal, economic and/or personal nature between the operators involved in the scheme for reduction of the tax burden and thus whether the parties to the transaction operate at arm’s length, the question whether a transaction gives rise to commercial burdens and risks typically associated with such transactions are relevant for the purpose of assessing the nature of the transaction.

Decisions of the ECJ have often followed the opinions of the AG but they are not obliged to do so.  It is expected that the ECJ could give their verdict before the end of this year.

If you would like to discuss the details of this case further, please contact Keith Rushen on 0044 (0)20 7486 2378.

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