Learning more about abuse

The Upper Tribunal is unimpressed by the taxpayer’s argument in Huddersfield University.

'Abuse’ is the VAT equivalent of the GAAR. Abuse arises where extra transactions are inserted to create a VAT relief or ‘efficiency’ which, whilst available under the precise terms of VAT legislation, contradicts the purposes of the Principal VAT Directive, and where the structure’s essential motivation is to effect the artificial efficiency.

The case of Huddersfield University [2014] UKUT 0438 (TCC) was one of the earliest to be challenged by HMRC as an abuse. It was a classic ‘lease-back’ structure. The university incurred significant building costs, opted to tax the buildings in question, leased them on an ostensibly taxed rent to a body that was technically unrelated, but was nonetheless set up by the university purely for this purpose, and leased back. The intention (apparently) was for the lease arrangement to be collapsed at a point in time where it would achieve significant outright VAT savings, though that was reserved in the plans merely as a possibility.

The CJEU decision in Weald Leasing (C-103/09) teaches us that leasing is not, per se, an abuse, because it is a normal commercial operation, and the effect of spreading VAT cost by leasing is not inimical to the purposes of the VAT Directive. However, the arrangement envisaged here had the dimension of collapsing the leases before they had run long enough to cover the VAT cost, thus creating an outright VAT saving.

The overarching ‘flavour’ of the Huddersfield University arrangement seems to be of contrivance, without commercial purpose, and implemented solely to save VAT which would have been suffered immediately on the construction. But the First-tier Tribunal (FTT) supported the taxpayer, deciding that HMRC had failed to identify the true abuse and had thus wrongly assessed. Sadly, for the University, the Upper Tribunal has reversed that decision.

Where was the doubt? Why did the Upper Tribunal need to be involved?

The ingenious argument made by the taxpayer’s team, and accepted by the FTT, was that, in line with the Weald precedent, a lease transaction with an ostensibly unrelated party, in order to spread the VAT cost, was not an abuse. It conformed to the commercial realities to which VAT rules naturally apply. An abuse arose only when and if the leases were collapsed too early to give rise to a full VAT cost over time. The argument was that, in assessing input tax deducted at the outset, HMRC had not targeted the real abuse, which occurred at the time that the leases were collapsed, and after the assessment was raised. Accordingly, HMRC assessed the wrong figure at the wrong time. At the date of assessment, abuse had not yet occurred. Furthermore, it was not definite that such an abuse would occur (though it did). The FTT decided that HMRC had missed the target, as it had no grounds for assessing the original input tax before any abuse occurred.

The Upper Tribunal was unimpressed. It did not see how it was possible to determine ‘abuse’ by dissecting the transactions and waiting until a time when the abuse was absolutely manifest. It was clear enough that the university always planned to collapse the leases to create an absolute saving. Furthermore, the Upper Tribunal could not see what taxable event occurred at this point which could give rise to an assessment. The assessment had to be for input tax, and that had been claimed at the construction stage, and not when the leases were surrendered. The FTT’s decision erected unrealistic barriers to finding that abuse had occurred. Since the arrangements as a whole were abusive, and had been planned as such from day one, the Upper Tribunal was confident in allowing HMRC’s appeal.

If an appeal proceeds, this issue of whether HMRC can read the events of the future back into the intentions of the present will be a key aspect.