In a ruling which vividly reveals that tax reduction schemes can be both lawful and highly effective, a car sales group that was issued with very substantial demands for back-tax and penalties in respect of complex arrangements designed to minimise VAT liabilities on the sale of second hand vehicles has scored a triumph over Her Majesty’s Revenue and Customs at the Court of Appeal.
Large numbers of cars were bought new by the group for use as demonstrator or courtesy vehicles before being sold on second hand. The scheme was designed to enable the group to recover all the input tax incurred on the purchase of the cars from manufacturers whilst taking advantage of the margin regime applied to second hand goods so that VAT was only payable on profit margins generated on the re-sale of the used vehicles. Given the reduced price of the second hand cars, those margins were very slight so that the benefits of the scheme were substantial.
Her Majesty’s Revenue and Customs (HMRC) issued the group with retrospective tax demands and penalties on the basis that the scheme was wholly artificial and had been set up with the sole or essential aim of obtaining an illegitimate tax advantage. The First-Tier Tribunal (FTT) allowed the group’s appeal, but HMRC’s challenge to that ruling was subsequently upheld by the Upper Tribunal (UT).
Allowing the group’s appeal, and restoring the decision of the FTT, the Court noted that it was accepted by HMRC that each transaction performed under the scheme – which worked in a five-step process and involved a number of intermediate companies – fully complied with all relevant statutory requirements under UK law.
HMRC nevertheless argued that the scheme involved an ‘abuse of right’ as a matter of European law. However, the Court ruled that the FTT had made no error in rejecting that submission. Noting that it was for the FTT to make the primary findings of fact in the case, the Court ruled that it was entitled to take the view that the essential aim of the scheme was to assist the group in obtaining finance.