Were Jersey VAT arrangements abusive - First-tier Tax Tribunal – Paul Newey t/a Ocean Finance –
There is a long and protracted history of this case.
- In simple terms, the taxpayer put arrangements in place to mitigate the impact of irrecoverable input VAT.
- One of the (many) golden rules of the VAT system is that input VAT incurred by a business cannot be reclaimed by that business if it relates (or is attributable to) the making of exempt supplies.
Ocean Finance arranged loans – a service that is exempt from VAT.
- This meant that without anything further, any VAT incurred by the business could not be reclaimed.
- The business sought to mitigate that VAT cost, and it put in place arrangements which, in effect, meant that no VAT would be incurred on its advertising costs.
- The arrangements involved establishing a company based in Jersey (outside the EU VAT territory) which meant that no VAT was chargeable and thus, no VAT was lost by being irrecoverable.
Not surprisingly, HMRC considered that the arrangements conferred a tax advantage on the company.
- HMRC considered that the correct position was that VAT was due on the advertising services and that VAT represented irrecoverable input tax in the hands of Ocean Finance.
- The sum at stake for the periods from July 2002 to December 2004 was £10.7 million.
At the original hearing of the taxpayer’s appeal in 2010, the FTT allowed the appeal.
- Whilst the arrangements were undertaken to provide a tax advantage, neither
- the scheme or arrangements involving the Jersey company
- nor any part of them was contrary to the purposes of the Sixth Directive.
HMRC appealed to the Upper Tribunal which, in 2011, referred the case to the Court of Justice for guidance in relation to the interpretation of EU law.
- The Court of Justice provided its judgment in 2013 and, in 2015, the Upper Tribunal dismissed HMRC’s appeal finding no error of law in the FTT’s original 2010 decision.
- HMRC then appealed to the Court of Appeal which considered that the Upper Tribunal’s judgment was flawed.
- The Court decided that the Upper Tribunal had erred because it had based its judgment on facts established by the FTT that turned out to be incorrect. T
- he Court of Appeal could have remade the decision itself but, as the issue rested on facts established at the FTT, it felt that the best way of dealing with the case was to refer it back to the FTT.
The latest decision published in October 2020 is the FTT’s decision after the case was reheard and the correct facts established.
- The FTT has concluded that having applied the correct test, the business relationships actually entered into between Mr Newey, the Jersey company, the lenders and the advertising agency reflect the economic and commercial reality, and do not constitute a wholly artificial arrangement which does not genuinely reflect economic reality.
- In other words, whilst the arrangements put in place by Ocean Finance were designed to give it a tax advantage, the arrangements were not artificial and were not an abuse of rights granted by EU law.
Having spent more than a decade in litigation, it will be interesting to see whether HMRC will have the appetite to litigate the matter further.
- HMRC has 56 days from 14 September to lodge a further appeal.
- There is an unwritten principle of EU law that prevents the abuse of rights.
- In this case, the taxpayer set up an ‘offshore’ arrangement which had the effect of removing a significant VAT charge (irrecoverable VAT incurred on advertising costs).
- It has taken ten years for the courts to decide that, even though it was clear that the arrangements put in place were intended to obtain a tax advantage, those arrangements were genuine and were not a sham.
- The advertising services were supplied to the Jersey company and not to Ocean Finance and the arrangements did not abuse the law.