“1: Sufficient funding in place plus an additional safety margin to cover contingencies “headroom”; 2: Ensure that the funding is committed within a range of repayment dates; 3: Avoid dependency on a single source of financing; and 4: Always consider the overriding fact that running out of money means the liquidation or reconstruction of the company. This is a high price to be paid by the employees and other stakeholders of business”. 46 Pendragon had expanded greatly over a relatively short period. This had to a large extent been financed by borrowings which were consequently considerable. Pendragon had a relatively small number of financiers when Mr. Forsyth arrived. Mr. Forsyth wished to increase the number of potential lenders particularly as Pendragon wished to expand further. This, we find, was objectively part of sensible risk management. 47 Pendragon’s gearing and headroom were of great concern to potential lenders particularly as Pendragon wished to expand further. We were shown figures and a chart for the relevant period setting out how close to various limits at various times Pendragon’s position was. For reasons of commercial confidentiality we do not record the detail here. The parties agreed that we should do this. 48 Suffice it to say objectively the company would be in a much better position if it had a greater range of potential financiers, much greater headroom and healthier gearing and a better range of repayment dates. It would certainly have benefited from a greater number of payment dates as the bunching of repayment dates and their effect on headroom etc was potentially very difficult as the documents produced showed starkly. This all made further sources of funding finance very important objectively to Pendragon and the Pendragon Group. We find this as a primary fact on the basis of a number of objective criteria. These include the information that would have been available to a third-party lender such as gearing and other lending ratios. The documents in question are in the Bundles and so available to the Court should it require them. 49 Pendragon had considerable need for funding from a diversity of sources particularly bearing in mind Mr Forsyth's four tenets. However, although devised for Mr Forsyth we consider that they were also objective factors which we can properly take into account. We do take them into account as objective factors. Central Aim etc 50 We have carefully considered the position here in the light of these objective factors and all the circumstances of the case from an objective perspective. We consider that the obtaining of finance in all the circumstances of the case was the predominant, principal or a central aim of the transactions and we so find as a primary fact on the basis of objective factors. 51 This was clearly the case for the first tranche and we consider it also to be the case, though less certainly, for the second tranche. This is not to suggest that we are wavering as to the finding concerning the second tranche. We are not because the shortening was because of Budget uncertainty and not because finance was not needed. Again we find this on the basis of objective factors. 52 We find, having considered all the evidence and circumstances, that it is not “… apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage.”
“8 Option to Purchase When the Hirer has made all the payments under the Hire Agreement to the Owner of the Goods the Hirer will have the option, seven days after the Hire Agreement ends, of purchasing the Goods from the Ownerc for the Option to Purchase Price specified in the Agreement Schedule. The Hirer will not have this option if all payments have not been made with the hiring of the Goods has been terminated. The option will remain open for seven working days only. Until this option has been exercise the Goods remain the property of the Owner and, for the avoidance of doubt during or after the Period of Hire will the Hirer acquire any ownership in the Goods whether legal, or equitable, beneficial, economic or otherwise. If an option to purchase fee of£10.00 will apply per vehicle or such other amount from time to time notified in writing by the Owner and is payable upon exercise the option to purchase. Title to the Goods will pass from the Owner to the Hirer 14 days after exercise of the option to purchase”
“… KPMG has developed an arrangement in response to the ... July 1997 changes which we believe successfully limits the output tax liability on disposal of the vehicles to the value of the margin achieved. A key feature of our implementation package is the use of a third party, rather than a captive financial institution. We have been in discussion with a suitable Bank which has expressed an interest in participating in the arrangement and we can arrange an introduction to Pendragon”. 85 This fits well with Mr. Forsyth’s desire to meet more bankers in the light of Pendragon’s need for finance. 86 The notes also said “… The use of an established third party bank, rather than a captive finance house, will more easily meet the “financial institution” requirement of SI 1995/1268 Article 5(4) which is not defined in the legislation; additionally this will aid the defence against any challenge on Furniss v Dawson or Ramsay principles”
‘… any legal order which aspires to achieve a minimum level of completion must contain self-protection measures, so to speak, to ensure that the rights it confers are not exercised in a manner which is abusive, excessive or distorted. This requirement is not at all alien to Community law …’
"the ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."
“in the context of interpreting the Sixth Directive, an abusive practice can be held to exist where: — 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; — it is apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage". This makes it clear that abuse is not limited to the situation where the sole purpose is the obtaining of a tax advantage. It is sufficient if it is essential aim. 142 We also have the helpful questions in WHA to apply in deciding this issue. 143 We also note that The ECJ has said that: (a) It must also be borne in mind that a finding of abusive practice must not lead to a penalty, for which a clear and unambiguous legal basis would be necessary, but rather to an obligation to repay, simply as a consequence of that finding, which rendered undue all or part of the deductions of input VAT (see para 93). (b) It follows that transactions involved in an abusive practice must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice . Who is to decide what? 144 The Court said at 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 action constituting such an abusive practice has taken place in the case before it (see Eichsfelder Schalchtbetrieb (Case C-515/03 )[2005] All ER (D) 306 (Jul), para 40)”. 145 It continued at 78 “In that connection, it must be borne in mind that the deduction system under the Sixth Directive is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT consequently ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT (see, in particular, Abbey National plc v Customs and Excise Comrs (Case C-408/98 )[2001] STC 297 ,[2001] 1 WLR 769 , para 24, and Ziti Modes[2005] STC 1059 ,[2003] ECR I-14393 , para 38)”. 146 The Tribunal therefore has decide in accordance with English rules whether an abusive practice has taken place. This we have attempted to do. 147 We remind ourselves that the ECJ said at paragraph 81: "As regards the second element, whereby the transactions concerned must essentially seek to obtain a tax advantage, it must be borne in mind that it is the responsibility of the national court to determine the real substance and significance of the transactions concerned. In so doing, it may take account of the purely artificial nature of those transactions and the links of a legal, economic and/or personal nature between the operators involved in the scheme for reduction of the tax burden (see, to that effect, Emsland Stärke[2000] ECR I-11569 , para 58)". 148 The ECJ summarised the position at paragraph 86 in a slightly different form of words. For it to be found that an abusive practice exists, it is necessary, first, that the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and of 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. 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. 149 Part Service unlike Halifax which dealt with "sole aim" considered whether transactions, the essential aim of which is to obtain a tax advantage could be abusive and concluded that it could apply if the attaining of a tax advantage was the principal aim (see paragraph 45 of the ECJ judgement). 150 The court considered that there was abuse in the case before it. It described the characteristics of the transactions which led it to that view at paragraph 57. This reads: “In the present case, the transactions at issue in the main proceedings, as described by the referring court, have the following characteristics: the two companies taking part in the leasing transaction are part of the same group; the service supplied by the leasing company (IFIM) is subject to a division, the financing element is entrusted to another company (Italservice) to be split into a credit service, an insurance service and a brokerage service; the service of the leasing company is therefore reduced to a service for renting a vehicle; the lease payments made by the customer are of an amount which is only slightly higher than the purchase cost of the vehicle; that service, considered in isolation, therefore seems to be economically unprofitable, so that the viability of the business cannot be ensured solely by means of contracts concluded with the customers; the leasing company receives the consideration of the leasing transaction only through the cumulative lease payments made by the customer and the amounts transferred from the other company of the same group”
“[12] The abuse issue can usefully be considered by answering four questions, which appear to emerge from the passages I have quoted from the judgment in Halifax . 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’? [13] Whilst one can analyse the issue in this case by breaking it down into these four questions, it is right to acknowledge that the answers may overlap to some extent, and that it may be a matter of opinion as to which question a particular argument or point goes. Nonetheless, I propose to consider the four questions in turn, as that makes it less difficult to achieve a structured and tolerably clear approach to what is, to my mind at least, a potentially confusing problem”. 157 We gratefully adopt this approach and the helpful guidance from the Court of Appeal and seek to apply it. We turn now to consider these four questions. The first two questions essentially restate the tests in Halifax . Is the Scheme or part of it contrary to the purpose of the Sixth Directive? 158 Lord Neuberger reminded us at paragraph [14] that the European Court drew a distinction between transactions entered into ‘in the context of normal commercial operations’ and those entered into ‘solely for the purpose of wrongfully obtaining advantages provided for by Community law’. The latter type of transaction is capable of constituting an abuse, provided it satisfies the two tests identified the application of the abuse doctrine. Such a transaction or scheme will not satisfy the first test unless it is ‘contrary to the purpose’ of the principles governing the payment of VAT, which include the ‘provisions of the Sixth Directive’ (see para 74), as well as ‘the principle of fiscal neutrality’ (see para 80). He also said that the purposes of the VAT provisions is, to be found primarily by reference to the provisions of the Sixth Directive, EC Council Directive 77/388 [21] . 159 We have discussed Article 26a and its policy and rationale (see 18 above). We concluded it does not reveal a clear underlying policy but does want gradual adaptation of the legislation in specific areas. It does not refer to “trapped VAT” nor require “Input VAT” to have been paid. It does make it clear that a uniform basis (presumably a margin scheme) should apply to used goods works of art, antiques and collectors' items. 160 In the light of the requirement of certainty that the ECJ has emphasized it would require in our view a clearer policy, rationale or purpose to be able to say that in this context the Sixth Directive was being abused by virtue of the transactions. Bearing in mind those Second-Hand goods i.e. used cars are being sold it is not obvious that this is against its purpose. 161 We conclude that the transactions are not against the purposes of the Sixth Directive. If we are wrong on this then as we consider the essential aim to be finance and not the obtaining a tax advantage of it should not make a difference to the outcome. Was the essential aim of the Scheme to obtain a tax advantage? 162 Lord Neuberger reminds us that the question of purpose was to be judged objectively and not subjectively, i.e. by reference to the terms of the scheme concerned and the commercial realities, not by reference to what the parties concerned say their intention was (or what their subjective intention is found to have been). Thus in paras 75 and 86, the court made reference to the necessity of basing one’s conclusion as to the intention on ‘objective factors’. The point was more fully made in para 87 of the Advocate General’s opinion [22] . He said in particular "In fact, when applying it, the national authorities must determine whether the activity at issue has some autonomous basis which, if tax considerations are left aside, is capable of endowing it with some economic justification in the circumstances of the case". 163 We have been careful in considering Mr Forsyth's evidence to look to the commercial realities objectively as to the position of Pendragon and to consider the terms of the transactions. 164 We consider (even ignoring Mr Forsyth’s evidence) that the obtaining of finance provided some autonomous basis which if tax considerations are left endows some economic justification in the circumstances of this case and we so find. 165 This is so not because Mr Forsyth said that the company needed finance but from the position of the officious bystander it was clear that the company in this business would need considerable finance available to it. A company in Pendragon's position as regards headroom and gearing in particular would clearly need finance and on the finest terms available. 166 It is permitted to arrange affairs to take advantage of the relevant tax provisions provided it is not abusive. Here we find that the financing was necessary but was done in a tax efficient but non-abusive way. The ECJ has not prevented this. It specifically says that one may choose the more tax efficient way of carrying out a transaction. We consider that this was what Pendragon did and we find this as a primary fact. The obtaining of finance provided a sufficient autonomous basis and economic justification. 167 This case is distinguishable from Part Service where economic interdependence meant that the business splitting could not be regarded as genuine. Consequently, it was abusive even though it fulfilled the technical requirements of such treatment. It did not represent “normal commercial operations’ but was entered into ‘solely for the purpose of wrongfully obtaining advantages provided for by Community law’. 168 We find that Pendragon was fully aware of the VAT position. It would be surprising if they were not. They had a significant in-house tax team and had taken advice from leading accountants and practitioners on the matter. The fact that they took advice does not make the transactions abusive. 169 In reaching this conclusion we have borne in mind what Lord Neuberger said at paragraph [29] in WHA that "Of course, in one sense at any rate, the purpose of the Scheme was to enable NIG’s liabilities under the MBIs to be performed and to be reinsured. So, it may be contended, tax avoidance cannot be said to be the sole, even arguably the main, purpose of the Scheme, viewed as a whole. However, as I see it, when considering the purpose of the Scheme for present purposes, one must primarily address the aspects of the Scheme which are artificial". He also reminded us that the national court/ tribunal must ‘determine the real substance and significance of the transactions concerned.’ This plainly seems to envisage that a scheme may be abusive while having a genuine underlying commercial purpose. The transfer of the business as a going concern from outside the Pendragon group does not in our view amount to an abusive artificial transaction. Any lender would be likely to require security and where chattels were concerned would be highly likely to want ownership of the goods as well as a right to the income stream. Given the need for finance from a third-party who would require such security we find this to be part of the normal commercial operations in these particular circumstances and not transactions ‘solely for the purpose of wrongfully obtaining advantages provided for by Community law’. 170 We also note that His Lordship says that a scheme may be abusive while having a genuine underlying commercial purpose. We have already found that there is a genuine commercial purpose here. We do not consider that the use of the hybrid hire purchase agreements and/or the transfer of the business as a going concern are themselves are abusive. They have a commercial purpose in connection with the financing - the sale and leaseback could not otherwise have been obtained. Pendragon on advice chose “… to structure their business so as to limit their tax liability (see Halifax paragraph 73). This was not abusive. 171 Mr Forsyth's position, although similar to that of Mr Ross-Roberts as regards his own personal views as to the subjective reasons for the transactions are not the basis on which we have reached our conclusions. We have adopted an objective approach and so Lord Neuberger’s warning does not apply. 172 As regards the point that a taxpayer who has alternative courses open to him is entitled to choose that which minimises his liability to VAT Lord Neuberger does not consider that there was anything in that point in WHA . He said "there may be cases where it is difficult to decide whether a particular arrangement is one which includes a step or steps which amount to an abuse or whether it is a course which is properly open to the taxpayer as a way of minimising his liability to VAT. However, this is not such a case”