The Supreme Court has ruled that a scheme reducing VAT liability for car sales is abusive under EU law.
The respondent car sales group employed a VAT liability reduction scheme, so that it would only account for VAT on the difference between the wholesale purchase price and the retail sale price of its demonstrator cars. The scheme satisfied the conditions for VAT exemption and the application of the margin scheme. HMRC argued that the scheme was abusive under EU law and that the respondent should pay back the VAT avoided. The FTT dismissed the appeal decision, which was overturned by the UT on appeal. The Court of Appeal agreed with the FTT and ruled that the scheme was not abusive.
The Supreme Court held that the scheme was abusive, as follows:
- For the scheme to be abusive the transactions had to confer a tax advantage contrary to the purpose of the relevant EU Directive (the Sixth Directive). Here, the direct purpose of the margin scheme was to grant relief to traders who had purchased goods from a supplier who had no right to deduct input tax in respect of its own acquisition of them. The indirect purpose of the margin scheme was therefore to avoid double taxation. However, in the present case, a system designed to prevent double taxation had been exploited so as to prevent any taxation at all.
- Secondly, it had to be objectively apparent that the essential aim of the transaction was to obtain a tax advantage. Even if a transaction had a legitimate commercial purpose, it could be challenged if its main aim was the accrual of a tax advantage. It was not in itself objectionable that the respondent chose to enter into a transaction with an offshore bank. However, it was essential to the scheme that one of the captive leasing companies should acquire the cars as part of a business as a going concern, and for that to be possible, it was essential that the transferor of the business should have acquired the cars by assignment. These steps were included for the sole purpose of reducing VAT liability.
Commissioners for Her Majesty’s Revenue and Customs (Appellant) v Pendragon plc and others (Respondents) [2015] UKSC 37, 10 June 2015
