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HMRC v Weald Leasing Ltd
Weald was set up to provide leasing services to the Churchill insurance group. Churchill was an exempt trader and so could not expect to recover VAT incurred on capital expenditure. It therefore decided to lease, rather than buy, capital items. When a new item was to be purchased the funds would be transferred to Weald, which would buy the item and lease it to Suas Ltd, a company owned by Churchill’s VAT adviser, which would in turn sub-let the item to the company in the Churchill group that had need of the item. The interposition of Suas – a party unconnected to Churchill – enabled rentals to be set at artificially low levels without HMRC having power to direct that the transactions be redefined at market value. This enabled the irrecoverable VAT suffered by Churchill on lease rentals to be spread over a longer period than arm’s-length dealings would have permitted.
HMRC failed to persuade the VAT Tribunal that leasing rather than purchasing capital items was abusive in a VAT context. As the European Court said at paragraph 73 of its decision in Halifax plc and others v Commissioners of Customs and Excise Case C-255/02 [2006] STC 919:
“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 paragraph 85 of his opinion, taxpayers may choose to structure their business so as to limit their tax liability.”
HMRC appealed to the High Court, arguing that leasing could still be abusive if it were outside the normal commercial operations of the trader. Mr Justice Lindsay disagreed. For one thing, it would be extremely difficult to decide whether a transaction was or was not outside the normal commercial operations of a trader. Would the first instance of a transaction be outside and later instances within? Would “normal” be compared to that trader’s operations or the operations of traders generally within the trader’s industry? In any case, it was a misinterpretation of Halifax to suggest that transactions outside normal commercial operations could be abusive without more. What the Court said, at paragraph 86 was that:
“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.”
Whether the transactions were within normal commercial operations was a guide to deciding whether the essential aim of the transactions was to obtain a tax advantage but deciding that they were outside did not then lead inevitably to the conclusion that the grant of the tax advantage was contrary to the purpose of the Sixth Directive and national legislation. That was a separate issue and, in Mr Justice Lindsay’s view, one which the Tribunal had decided correctly in holding that leasing rather than purchasing was not contrary to the purpose of the legislation.
The Judge then went on to agree with the Tribunal that the potentially abusive part of the scheme lay in the non-commercial leases, allied with interposition of Suas. Had redefinition of the transactions been necessary in line with Halifax, the Judge would have ordered redefinition as if the leases had been commercial, or at arm’s length. He would not, as HMRC had argued, have redefined the transactions as if Churchill had purchased all the capital items outright. As it happened, HMRC had specifically chosen not to argue that the non-commercial leases and interposition of Suas were abusive and so could not rely on that line of argument before the High Court.
HMRC's appeal was dismissed.
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