UK and International Tax news

FTT Reconfirms Decision On VAT Planning Arrangements

Friday 9th October 2020

The FTT has recently confirmed its previous decision in a VAT planning case that arrangements were not abusive and allowed the appellant’s appeal.

In Mr Paul Newey (T/A Ocean Finance) [2020] TC07844, the FTT reconsidered its previous decisions regarding VAT planning arrangements entered into by the appellant after the case was remitted back to it by the Court of Appeal.

Mr N traded for many years as a loan broker making VAT exempt supplies. Following concerns that other competitor businesses were not incurring VAT on their advertising expenses Mr N, with the assistance of his accountants, implemented a VAT planning arrangement to remove this VAT cost from the supply chain.

The arrangment involved setting up a Jersey based company to trade as a loan broker, with a loan processing agreement with Mr N.  J Co purchased advertising from another Jersey company and, as both companies were outside the UK, the Jersey supplier did not charge VAT and J Co did not have to account for VAT under the reverse charge mechanism.

HMRC considered that Mr N should have accounted for VAT under the reverse charge on the basis that, as a matter of VAT law, Mr N was the recipient of the advertising services, or that if Mr N was not the recipient of the advertising services, he should be treated as the recipient on the grounds that the scheme, viewed as a whole, was abusive under EU law.

The first FTT hearing allowed the appeal because it concluded that J Co was a commercial business undertaking an economic activity.

However, on appeal, the Court of Appeal considered that the first FTT decision contained two errors, being that J Co was not making exempt supplies in the UK when it was, and this was accepted by both parties, and in its approach to the facts of the case and the determination of whether or not the arrangements were abusive, the FTT had not adopted the approach laid down by the ECJ.

The FTT was asked to review the case law on the question of what constituted abusive tax avoidance. The ECJ has previously held that the ‘abuse of rights doctrine’ bars wholly artificial arrangements which do not reflect economic reality and which are set up with the sole aim of obtaining a tax advantage. In addition, contractual terms are not the decisive factor when identifying suppliers and recipients of services. They may be disregarded if they do not reflect the commercial and economic reality but constitute an artificial arrangement set up to solely to obtain a tax advantage. The ECJ also held that the national court should determine whether the contractual terms genuinely reflect the economic reality.

The FTT held that the contractual relationships between the parties did reflect the economic and commercial reality, and that the advertiser did make supplies to J Co which used them in the course of its loan broking business. It also held that whilst some activities of J Co’s business were subcontracted to Mr N, J Co was independent of Mr N.

It is noted that the dispute between Mr N and HMRC has been ongoing for over ten years ago and concerned VAT assessments relating to the years 2002-2004.  HMRC has yet to confirm whether it will appeal.

This case shows the importance of ensuring the proper implementation of VAT planning arrangements, particularly with regard to the independence of the non- resident company with effective independent directors and supporting documentation for all transactions.

 

If you would like more detail on the above, please contact Keith Rushen on 0207 486 2378.

 

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