“Contractual terms, even though they constitute a factor to be taken into consideration, are not decisive for the purposes of identifying the supplier and the recipient of a “supply of services” within the meaning of arts 2(1) and 6(1) of [the Sixth Directive]. They may in particular be disregarded if it becomes apparent that they do not reflect economic and commercial reality, but constitute a wholly artificial arrangement which does not reflect economic reality and was set up with the sole aim of obtaining a tax advantage, which it is for the national court to determine.”
“244. …Although [the FTT] did not say so in so many words, they considered that the Alabaster arrangements did reflect an economic and commercial reality which did not produce a result contrary to the purpose of the Sixth Directive. Had they expressed their conclusion in the language of the CJEU Judgment, it is clear, in my view, that they would have concluded that the arrangements were not wholly artificial arrangements which did not reflect economic and commercial reality. It is not just that I consider this is what they would have said: I perceive what they actually said as inconsistent with a contrary conclusion. 245. Can the Tribunal’s conclusion on abuse nonetheless be overturned on the basis of the errors which HMRC allege? In this context, the question is not whether I would have reached the same conclusion but whether the evaluation of the Tribunal in the light of the unchallenged findings of primary fact displays an error of law. 246. Although HMRC have demonstrated a number of areas where the Tribunal have not expressly dealt with factors on which HMRC now rely and where the Tribunal has attached weight which HMRC consider to be wrong, I do not consider that the criticisms are sufficient for me to say that the Tribunal has erred in law in reaching its conclusions.”
“50. The difficult concept of “abuse of law” as developed by the European Court, though not strictly one of statutory construction, is a general principle of central importance to the operation of the VAT scheme. It matters little whether it is described as involving an issue of mixed law and fact, or of the evaluation of facts in accordance with legal principle. However it is described, it was clearly one which was particularly well suited to detailed consideration by the Upper Tribunal, with a view to giving guidance for future cases. Having found errors of approach in the consideration by the First-tier Tribunal, it was appropriate for them to exercise their power to remake the decision, making such factual and legal judgments as were necessary for the purpose, thereby giving full scope for detailed discussion of the principle and its practical application. Although no doubt paying respect to the factual findings of the First-tier Tribunal, they were not bound by them… 51. Against this background, it was unhelpful, in my view for the Court of Appeal to identify the main issue as to whether the Upper Tribunal went beyond its proper appellate role. The appeal to the Court of Appeal (under s 13) was from the decision of the Upper Tribunal, not from the First-tier, and their function was to determine whether the Upper Tribunal had erred in law. That was best approached by looking primarily at the merits of the Upper Tribunal’s reasoning in its own terms, rather than by reference to their evaluation of the First-tier’s decision…The Upper Tribunal reached a carefully reasoned conclusion on law and fact. The task of the Court of Appeal was to determine whether that conclusion disclosed any error of law.”
“Successful advertising for potential borrowers was critical to the loan-broking business. The advertising spend was a considerable cost of the business; in the year to31 December 2004 , Alabaster’s spend on advertising reached in excess of£22m . This was key to the profitability of Alabaster, and indirectly, through its fee arrangement in respect of its services under the services agreement giving it a percentage of Alabaster’s commissions, that of [Mr Newey]. In the latter stages of its operations Alabaster was authorising and approving in excess of£400,000 of advertising spend per week.”
“On occasion advertising space would become available at a late stage, and would be offered to Alabaster through Ekay and Wallace Barnaby, following discussion with [Mr Newey]. However, if there was insufficient time to obtain a decision from an Alabaster director, the advertisement would not be placed. We had evidence, which we accept, that this happened on a number of occasions. No advertising was commissioned without the approval of Alabaster.”
“50. Mr Vajda argued that there was no business advantage to the operation of Alabaster in Jersey, and that Alabaster was not run in a commercial manner…We accept that, if compared with an arrangement that might have been entered into between independent parties operating at arm’s-length, the arrangements lack certain commercial features. It is true, and [Mr Newey] accepted, that the loan-broking business could have been carried out in the UK, and the loan-broking business could have been pursued with an integrated, rather than sub-contracted, processing service. Nevertheless, we find that Alabaster carried on a commercial business. It was itself a commercial enterprise, carrying on economic activities of loan-broking for which it equipped itself to a limited extent with its own staff and directors, and to a large extent through engaging the services of [Mr Newey] under the services agreement. This was no brass plate company. Nor do we consider that it is in any way material to the question of commerciality that advice on the decision-making processes in Alabaster had been given by Moore Stephens. … 52. It is common ground that [Mr Newey’s] operation in the UK was a substantial one. We were referred to the salaries of senior staff and underwriters in the UK, which were substantial when contrasted with those of the Alabaster directors and Lucy Woodworth [a member of Alabaster’s staff]. However, this merely emphasises the extent of the processing operation that Alabaster had contracted to equip itself to conduct its loan-broking business. We do not infer from this that it must have been [Mr Newey] that was carrying on the loan-broking business. We are satisfied that the loan-broking business was carried on by Alabaster, with the services of [Mr Newey] provided through the services agreement. 53. There was much reference by Mr Vajda in cross-examination of both Mr Boylan and Mr Newey to Alabaster “rubber stamping” decisions of others. This was put to the witnesses in connection with all stages of the processes, including advertising approvals, the OAFs [offer authority requests], valuation requests and case to bank submissions. It was also described as “window dressing”
“The following shall be subject to value added tax: 1 the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such; …”
“In order to avoid double taxation, non-taxation or the distortion of competition, the Member States may, with regard to the supply of services referred to in paragraph 2(e),…consider: … (b) the place of supply of services, which under this Article would be situated outside the Community, as being within the territory of the country where the effective use and enjoyment of the services take place within the territory of the country.”
“(1) VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him. (2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.”
“(a)“supply” in this Act includes all forms of supply, but not anything done otherwise than for consideration; (b) anything which is not a supply of goods but is done for a consideration…is a supply of services.”
“A supply of services shall be treated as made – (a) in the United Kingdom if the supplier belongs in the United Kingdom; and (b) in another country (and not in the United Kingdom) if the supplier belongs in that other country.”
“(1) Subject to subsection (3) below, where relevant services are – (a) supplied by a person who belongs in a country other that the United Kingdom, and (b) received by a person (“the recipient”) who belongs in the United Kingdom for the purposes of any business carried on by him, then all the same consequences shall follow under this Act (and particularly so much as charges VAT on a supply and entitles a taxable person to credit for input tax) as if the recipient had himself supplied the services in the United Kingdom in the course or the furtherance of his business, and that supply were a taxable supply. (2) In this section “relevant services” means services of any of the descriptions specified in Schedule 5, not being services within any of the descriptions specified in Schedule 9 [i.e. exempt services]. (3) Supplies which are treated as made by the recipient under subsection (1) above are not to be taken into account as supplies made by him when determining any allowance of input tax in his case under section 26(1). ”
“As regards in particular the importance of contractual terms in categorising a transaction as a taxable transaction, it is necessary to bear in mind the case law of the court according to which consideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT…”
“72. However, as the Court has held on numerous occasions, Community legislation must be certain and its application foreseeable by those subject to it… That requirement of legal certainty must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which they impose on them… 73. Moreover, it is clear from the case law that a trader’s choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the VAT system… Where the taxable person chooses one of two transactions, the Sixth Directive does not require him to choose the one which involves paying the highest amount of VAT. On the contrary, as the Advocate General observed in para 85 of his opinion, taxpayers may choose to structure their business so as to limit their tax liability. 74. In view of the foregoing considerations, it would appear that, in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions. 75. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. As the Advocate General observed in para 89 of his opinion, the prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages. 76. It is for the national court to verify in accordance with the rules of evidence of national law, provided that the effectiveness of Community law is not undermined, whether such action constituting such an abusive practice has taken place in the case before it…”
“85. Furthermore, the Court has consistently held, in consonance with the position generally accepted by Member States in the tax domain, that taxpayers may choose to structure their business so as to limit their tax liability. In BLP Group Plc v Customs and Excise Commissioners (Case C-4/94 )[1995] STC 424 ,[1996] 1 WLR 174 , the Court ruled that “a trader’s choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the VAT system”
“VAT is, in effect, an indirect general tax on consumption meant to be borne by the individual consumers. Correspondingly the same principle requires that a taxable person must not be entitled to deduct or recover the input VAT paid on supplies received for its exempted transactions. As long as no VAT is charged on the goods or services provided by taxable persons, the Sixth Directive necessarily seeks to prevent them from recovering the corresponding input VAT. This entails the consequence emphasised by the Commission at the hearing that exemption from VAT within the meaning of the Sixth Directive does not mean that the Sixth Directive was intended to free the final consumer completely from every tax burden”
“…anelaborate scheme designed and marketed by KPMG relating to demonstrator cars used by retail distributors for test drives and other internal purposes. In the ordinary course, a car distributor will buy new cars for use as demonstrators, paying VAT on the full amount of the sale price. This will in due course be recoverable as input tax by being set off against the output tax for which the distributor was accountable on its taxable supplies. The object of the KPMG scheme was to ensure that companies in the distributor’s group were able to recover input tax paid on the price of new cars acquired as demonstrators from manufacturers, while avoiding the payment of output tax on the price at which the car was ultimately sold second-hand to a consumer.”
“4. It is common ground that at a purely technical level, the KPMG scheme worked. That is to say, the transactions envisaged at Steps 3 and 4 satisfied all the statutory conditions for exemption from VAT, and the transaction envisaged at Step 5 satisfied all the statutory conditions for the application of the margin scheme. But that is not the end of the matter. Value Added Tax is an EU tax imposed pursuant to successive Directives of the European Union, at the relevant time the Sixth Directive. The Directives are subject to the principle of abuse of law. By virtue ofsection 2(1) of the European Communities Act 1972 the same principle must apply to domestic legislation implementing the Directives. 5. Abuse of law is a concept derived from civil law jurisprudence, which is unknown to English common law but has been adopted by the law of the European Union. In its simplest form, it confines the exercise of legal rights to the purpose for which they exist, and precludes their use for a collateral purpose. For present purposes, the expression détournement de droit adopted by some French writers is probably a better description of its content. The application of the principle to tax avoidance schemes calls for a difficult balance to be drawn. It is traditional, at any rate in this jurisdiction, to distinguish between avoidance, which involves the lawful arrangement of a taxpayer’s affairs so as to minimise his tax bill, and evasion, which is an unlawful failure to account for tax due, generally by suppressing or falsifying information. Sophisticated avoidance schemes do not so much undermine this distinction as challenge its usefulness. By artificially reclassifying transactions so as to produce a more favourable tax outcome than commercially comparable “normal” transactions, they frustrate the objective of the taxing provision without necessarily falling foul of its language. The result is arbitrarily to depress tax receipts, producing inequity between taxpayers and potentially distorting competition between firms who are otherwise similarly placed. This gives rise to social costs which are significant and increasingly controversial. On the other hand, legal certainty is an important principle of both English and EU law, particularly when it comes to justifying the financial demands of the state. Artificiality, if it is to be deployed as a workable legal concept, has to be tested against some standard of transactional normality, and the search for such a standard is far from straightforward. Taxpayers faced with a choice between alternative ways of achieving some commercial objective are in principle entitled to select the one with the more tax-efficient statutory outcome. In particular, they are entitled to choose between exempt and taxable transactions in their own financial interest. Like any other tax, VAT is due only in so far as its imposition is authorised by statute. It follows that although the courts may examine the commercial reality of transactions without being unduly hidebound by labels, they do not as a general rule enlarge the scope of a taxing provision by reference to considerations which affect neither the construction of its language nor the characterisation of transactions to which it is said to apply. These dilemmas are particularly acute in the United Kingdom, where the drafting of tax legislation has traditionally depended not on the formulation of general principles but on the definition of taxable occasions with a high degree of specificity.”
“10. Two main difficulties arise where the principle of abuse of law is applied to tax avoidance schemes. 11. The first arises from the assumption made by the Court of Justice in Halifax that the principle will not apply to what it called “normal commercial operations” (para 69). Subsequent case-law has established that this means those that are normal in the context of the relevant line of business, not necessarily normal for the particular taxpayer: Revenue and Customs Commissioners v Weald Leasing Ltd (Case C-103/09 )[2011] STC 596 . I do not think that the court can have intended to set up a third distinct test, in addition to the two which are set out in paras 74-75 and repeated in its order. The “normality” of a transaction is relevant to the question posed in the court’s first test, about the “purpose” of the relevant provision of the VAT Directives. “Normal commercial operations” will not as a general rule be regarded as contrary to the purpose of the Directives, since these must be assumed to have been designed to accommodate them. Thus in Weald Leasing the taxpayer’s decision to take equipment on lease from an intermediate company rather than buy it outright was an ordinary commercial transaction. It was not abusive even though it was unusual for the taxpayer in question and was designed to obtain a tax advantage by spreading the liability to tax over a longer period. The choice between leasing and outright purchase was a choice accommodated by the scheme of the VAT legislation. The tax treatment of lease payments being a facility available under the legislation itself, resort to it could not be regarded as contrary to its purpose. For the same reason, a transaction is not abusive merely because it falls within an exception or derogation from ordinary principles of EU law governing the incidence of VAT, such as the right enshrined in the Sixth Directive to deduct input tax generated by transactions in another member state. It follows that the sourcing of goods or services from a country in which the VAT regime is more favourable is not in itself abusive, even though the object and effect is to allow the deduction of input tax without the payment of output tax (Revenue and Customs Commissioners v RBS Deutschland Holding GmbH (Case C-277/09 )[2011] STC 345 ). The reason, as the court explained in that case at paras 51-52, is that this is a choice inherent in a scheme of taxation that is designed to be fiscally neutral as between different member states while allowing for some differences between their implementing laws. Likewise, the conduct of a genuine business activity through a subsidiary incorporated in another member state is not abusive, although the sole reason for the choice is that it has a lower rate of corporation tax: Cadbury-Schweppes Plc v Inland Revenue Commissioners (Case C-196/04 )[2006] STC 1908 . Precisely the same considerations must apply to a decision to source goods or services from outside the European Union, an option which is inherent in the territorial limits of the EU VAT regime and the assignment of economic relations with third countries to other policies of the Union. 12. The second difficulty which arises from the application of the principle of abuse of law to tax avoidance is that of concurrent purposes. Tax avoidance schemes are rarely directed exclusively to tax avoidance. It is difficult to conceive of a scheme, other than a fraudulent one, which achieved absolutely nothing but a tax advantage. They are usually directed to achieving a commercial purpose, such as the provision of the call centres in Halifax, in a way which avoids a tax liability that would otherwise be associated with it. The potential for abuse consists in the method chosen to achieve the commercial purpose. In Ministero dell’Economia e delle Finanze v Part Service Srl (Case C-425/06 )[2008] STC 3132 , the consideration payable by the lessee under a leasing transaction was artificially split between two contracts, one with the lessor and the other with an associated company of the lessor. The latter contract was structured so as to qualify as an exempt financial contract under Italian law, so as to reduce the amount chargeable to VAT. The transactions had a legitimate commercial purpose, namely the leasing of the cars, but the method of achieving that purpose was held to be open to challenge if “the accrual of a tax advantage constitutes the principal aim of the transaction or transactions at issue” (para 45). This conclusion seems to me to do no more than make explicit something which is implicit in the Halifax tests. Identifying the “essential aim” in a case of concurrent fiscal and commercial purposes depends on an objective analysis of the method used to achieve the commercial purpose. As Advocate General Maduro observed in a passage from (para 89) of his opinion which was in terms approved by the court (para 75), the taxpayer’s choices must be “at least to some extent, accounted for by ordinary business aims”
“The selection as the funding bank of an offshore institution which was not a taxable person cannot in itself be regarded as objectionable. It is no part of the policy of the legislation that a party should be restricted in its freedom to select as its commercial partners firms whose place of residence gives dealings with them a tax advantage, even if that is the only reason for their selection. But it is not just the non-resident status of SGJ which enabled the tax advantage to be obtained. The particular method by which SGJ was brought into the chain of contracts, involving successive transactions by which Pendragon navigated its way from one VAT exemption to another, was an unnecessary and artificial way of involving them.”
“The redefinition is purely notional. Its effect is not to alter retrospectively the terms of the transactions, but simply to entitle the Commissioners, as between themselves and the taxpayer, to treat them for the purpose of assessing VAT as if their abusive features had not been present…The object of any redefinition in this case must be to deprive the taxpayer of the illegitimate advantage of paying VAT only on their profit margin on the resale of the cars to the consumer.”
“Whether the first test is satisfied entails identifying (a) the tax advantage that the scheme gave the University and (b) the purposes of that part of the VAT code with which we are concerned. It is then necessary to compare the purpose and objective of the part of the VAT code allegedly being abused with the purpose and results achieved by the activity at issue. If the tax advantage results from a choice that the VAT code intended to give the taxable person, there is no abuse: Advocate General Poiares Maduro in Halifax at para 88.”
“…a finding that there is an abuse presupposes an intention on the part of the Community exporter to benefit from an advantage as a result of the application of the Community rule by artificially creating the conditions for obtaining it.”
“34. Clearly the artificial creation of conditions which formally comply with the requirements for obtaining a tax advantage is at the heart of the principle of abuse of rights. If Mr Lasok’s submission were correct it would simply substitute one form of formalism for another.”
“…Weald Leasing concerned companies in the Churchill Group of companies, which principally made supplies of exempt insurance services. The operating companies, CML and CARC, were entitled to deduct only 1% of input tax incurred on purchase of equipment. Another company in the group, Weald Leasing, was set up to carry on the business of buying equipment and leasing it to a company outside the group (Suas Ltd) which in turn sub-leased the equipment to CML and CARC. CML and CARC thus avoided having to purchase directly the equipment they needed and avoided having to pay in a single sum the total amount of non-deductible VAT on those purchases. The aim of the transactions was to divide and spread the payment of that amount in order to defer the Churchill Group’s VAT liability.”
“A taxable person cannot be criticised for choosing a leasing transaction which procures him an advantage consisting… in spreading the payment of his tax liability, rather than a purchase transaction which does not procure him any such advantage, provided that that the VAT on that leasing transaction is duly and fully paid.”
“52. In those circumstances, the fact that services were supplied to a company established in one member state by a company established in another member state and that the terms of the transactions carried out were chosen on the basis of factors specific to the economic operators concerned, cannot be regarded as constituting an abuse of rights. RBSD in fact provided the services at issue in the course of a genuine economic activity. 53. It is important to add that taxable persons are generally free to choose the organisational structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purposes of limiting their tax burdens. 54. The court has held that a trader’s choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the neutral system of VAT…”
“44. It may, however, become apparent that, sometimes, certain contractual terms do not wholly reflect the economic and commercial reality of the transactions. 45. That is the case in particular if it becomes apparent that those contractual terms constitute a purely artificial arrangement which does not correspond with the economic and commercial reality of the transactions. 46. The court has held on various occasions that preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see Halifax, para 71 and the case law cited) and that the effect of the principle that the abuse of rights is prohibited is to bar wholly artificial arrangements which do not reflect economic reality and are set up with the sole aim of obtaining a tax advantage… 47. In the main proceedings, it is not disputed that formally, in accordance with the contractual terms, Alabaster provided the lenders with the supplies of loan broking services and that it was the recipient of the supplies of advertising services provided by Wallace Barnaby. 48. However, taking into account the economic reality of the business relationships between, on the one hand, Mr Newey, Alabaster and the lenders and, on the other hand, Mr Newey, Alabaster and Wallace Barnaby, as apparent from the order for reference and, in particular, the matters of fact mentioned by the Upper Tribunal…in the third question, it is conceivable that the effective use and enjoyment of the services at issue in the main proceedings took place in the United Kingdom and that Mr Newey profited therefrom. 49. It is for the referring court, by means of an analysis of all the circumstances of the dispute in the main proceedings, to ascertain whether the contractual terms do not genuinely reflect economic reality and whether it is Mr Newey, and not Alabaster, who was actually the supplier of the loan broking services at issue and the recipient of the supplies of advertising services provided by Wallace Barnaby. 50. If that were the case, those contractual terms would have to be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice (see, to that effect, Halifax, para 98). 51. In the present case, the re-establishment of the situation that would have prevailed in the absence of the transactions at issue, if the referring court were to consider them to constitute an abusive practice, would, in particular, mean that the services agreement and the advertising arrangements concluded between Alabaster and Wallace Barnaby could not be relied upon against the Commissioners, who could legitimately regard Mr Newey as actually being the supplier of the loan broking services and the recipient of the supplies of advertising services at issue in the main proceedings.”
“(3) In circumstances such as those in the present case, in particular, to what extent is it relevant: (a) Whether the person who makes the supply as a matter of contract is under the overall control of another person? (b) Whether the business knowledge, commercial relationship and experience rest with a person other than that which enters into the contract? (c) Whether all or most of the decisive elements in the supply are performed by a person other than that which enters onto the contract? (d) Whether the commercial risk of financial or reputational loss arsing from the supply rests with someone other than that which enters into the contracts? (e) Whether the person making the supply, as a matter of contract, sub-contracts decisive elements necessary for such a supply to a person controlling that first person and such sub-contracting arrangements lack certain commercial features?”
“…any deficiencies in this respect can be attributed to the fact that this was not such an arrangement. [Mr Newey] was the sole beneficial owner of Alabaster, and any element of non-arm’s length dealing is, in our view, attributable to that fact, and does not indicate to us that the activities of [Mr Newey] were anything other than those performed under and by virtue of the services agreement.”
“This was a more general theme, describing the agreements entered into by Alabaster with third-party lenders and the advertising agency, and the decisions taken by Alabaster in the course of its operations, in similar terms. We do not accept this description of Alabaster’s activities. Although we have found the original reason for deciding to set up the Jersey business was a tax reason, namely to avoid the irrecoverable VAT on advertising costs, that does not in our view result in all the activities of the business itself being for tax reasons… Similarly, if a business decides to establish all or part of its operations outside the UK, that may be attractive for tax reasons and indeed the purpose may be to avoid UK tax, but it does not follow that the offshore business, its contracts and operations, must be regarded as themselves tax-driven. 28. We find that, whilst not an arm’s length agreement, the services agreement did represent and reflect the real activities of [Mr Newey] and Alabaster… We find that the processing operations and other serves performed by [Mr Newey] were all performed under the services agreement. We further find that, whilst Alabaster did not itself have the infrastructure in Jersey to conduct a loan-broking business, it equipped itself to conduct such a business by outsourcing the processing operation to [Mr Newey]. Given this, we do not consider that the fact that there were only limited resources in Jersey itself has any impact on the carrying on by Alabaster of the loan-broking business. Whilst we accept that certain information known to [Mr Newey] in respect of Alabaster’s business, such as its profitability, and income and costs, might not be known to an arms’ length sub-contractor, it would be known to a 100% shareholder, and there is nothing in this fact that suggests that the contractual relationship between [Mr Newey] and Alabaster was anything other than contractor and sub-contractor.”
“We do not consider that on the facts of this case there was reciprocity between [Mr Newey] and the lenders nor between [Mr Newey] and Wallace Barnaby in relation to the advertising services so as to conclude that supplies of loan-broking services were made by [him] to the lenders or supplies of advertising services by Wallace Barnaby to [him]. Mere business relationships of the nature we have found in this case do not amount to reciprocal performance such as to conclude that a supply has been made on the basis of those relationships for a consideration. The services provided by [Mr Newey] were to Alabaster and Alabaster provided the consideration, in each case under the services agreement. That was a legal relationship under which there was full reciprocity and, although it is not necessary for there to be a legal agreement in order to find reciprocity, we do not detect in the relationships and dealings between [Mr Newey] and the lenders anything in the nature of a link between service and payment sufficient for there to be a transaction between them for “consideration”
“First, does the Scheme, or an aspect of the Scheme, result in the accrual of a tax advantage which, as HMRC assert, is “contrary to the purpose of” the provisions of the Sixth Directive? Secondly, if so, was it, as HMRC contend, the “essential aim” of the Scheme, or of the relevant aspect, that a tax advantage be obtained? Thirdly, if so, are there any special features of the Scheme itself, or of the law relating to it, which should nonetheless prevent the abuse argument succeeding? Fourthly, if not, can (and must) the Scheme, or the relevant part, be “redefined”?”
“87. Both Halifax and WHA were cases concerning the recovery of input VAT which would, absent the arrangements in question, have been attributable to exempt supplies made in the UK and thus would not have been recoverable. The effect of the arrangements was to make the VAT effectively recoverable. This case is different. HMRC argue that the arrangements here constituted an abuse by [Mr Newey] in order to bring the supplies outside the scope of VAT and avoid taxation of supplies (the advertising supplies) within the Community. They argue that this is contrary to the purpose of the VAT legislation. 88. Mr Vajda submitted that the logic of the tax requires that persons making exempt supplies in the Community should suffer the tax incurred in making those supplies. In this case he argued that the “insertion” of Alabaster as the “ostensible” (or, as we have earlier found, the actual) provider of loan-broking services, although claimed by [Mr Newey] to result in the consumption by Alabaster of the advertising services in Jersey and to be outside the scope of VAT when Alabaster’s supplies were made in the UK to UK lenders only, all loan applicants were resident in the UK and all advertising appeared in the UK media, in fact constituted objective circumstances which, despite formal observance of the conditions of Community law, result in the purpose of the Community rules not being achieved. He submitted that there is no difference in principle between an abusive scheme which operates on the basis of creating an entitlement to deduct VAT which would otherwise be irrecoverable and one which operates on the basis of preventing VAT which would be irrecoverable from being incurred in the first place. 89. As an initial comment we do not accept Mr Vajda’s characterisation of the structure adopted in this case as the “insertion” of Alabaster. That suggests that Alabaster has simply been introduced into a series of transactions which otherwise remain intact. That is not the case. What took place was the wholesale reorganisation of the basis upon which the overall business was operated… Nor do we accept Mr Vajda’s description of the structure as a “Jersey loop”
“Looked at objectively, we conclude that there could have been no purpose in the establishment of either the Lichfield or Alabaster structures other than to obtain the desired tax advantage. In the context of [Mr Newey’s] former business of loan-broking there was no commercial justification for [Mr Newey] ceasing to carry on loan-broking and instead to commence the provision of processing services to an associated company in Jersey. The Alabaster structure would not have been put in place but for the tax advantage sought to be derived. Furthermore, the way in which the Alabaster arrangements were structured, on the advice of Moore Stephens who provided detailed instructions on how the business was to be conducted to meet the tax requirements, and with directors, staff and premises sourced or provided by Moore Stephens, serves to confirm on an objective view, that this was a structure designed solely for the purpose of obtaining the tax advantage.”
“In the context of the facts in the present case, the CJEU did not, in my view, perceive any scope for departure from the contractual terms unless the arrangements were wholly artificial and did not reflect the economic and commercial reality…”
“Their findings of primary fact are applicable to the Abuse Issue as much as to the Categorisation of Supplies Issue; and aspects of their evaluation are apposite to the redefinition of the contractual terms as the result of abusive practice just as much as to the categorisation of the supplies absent any abuse.”
“It follows from this discussion, and in particular the conclusion in para [233], above, that the reasoning by which the [FTT] reached their conclusion on the first element of the Halifax test cannot stand in the light of the CJEU Judgment.”
“I do not say that, were the matter for me, I would have made the same evaluation. What I do say is that the evaluation which the Tribunal did make is one which they were entitled to make and one with which I should not interfere. Accordingly, I do not consider that the decision of the Tribunal on the Abuse Issue can or should be overturned on this appeal on a point of law.”