Halifax ruling opens ‘abuse of rights’ can of worms

In 2000, the European courts ruled out a clever wheeze. An Austrian
milk-powder manufacturer had hit on the idea of exporting the powder to attract
a subsidy, then importing it back and paying the tariff. Since the subsidy was
bigger than the tariff, it all turned into a nice little profit.

The scheme was an ‘abuse of rights’, the court said. The UK now has its own
abuse of rights principle after the Halifax and two other cases were decided
last week. So what does it all mean?

The key question, according to Greg Sinfield of Lovells, is to ask why you
are setting up an arrangement that gives you a tax advantage. ‘It’s not a
question of being “purely” for avoidance purposes. The crucial phrase is the
“essential aim”,’ he says.

How can something have an essential aim of accruing a tax advantage? How
would that be defined?

It may be difficult to know, but in these cases certain things stand out.
Bupa, for instance, may struggle to explain why a subsidiary borrowed seven
times its turnover to buy goods that would have lasted it 100 years, if the aim
was not avoidance.

Few businesses would make that decision for business purposes, and so having
such a structure leaves the company open to the accusation that it is trying to
avoid paying VAT.

Halifax set up a complex scheme of companies which is one thing HM Revenue
& Customs commissioners will look out for, Sinfield believes.

So what would have been the decision in other recent VAT cases with this
principle in place?

‘The Debenhams scheme, I should have thought, would definitely fall foul,’
Sinfield said.

In the Debenhams case, retailers set up card handling companies to channel
payments and avoid VAT. It lost in the end, but could have lost earlier (and not
won in the High Court) with the Halifax decision in place.

The Telewest case, which revolved around the cable operator selling a cable
service and a listings magazine through two separate companies to ensure the
latter was zero-rated, would be unlikely to have been attacked by this, he says,
given its legitimate business purpose.

Ultimately, the taxman looks set to win from the verdict. As Penny Hamilton,
the indirect tax barrister, said afterwards: ‘This creates uncertainty.
Businesses like certainty.’

HMRC is unlikely to say so publicly, but it will be hoping that this does sow
precisely those seeds of doubt.

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