Halifax Plc; Country Wide Property Investments Ltd; Leeds Permanent Development Services Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 February 2001 |
| Date | 28 February 2001 |
| Court | Value Added Tax Tribunal |
VAT Tribunal
VAT Tribunal
VAT Tribunal
The following cases were referred to in the decision:
BLP Group plc v C & E Commrs VAT(Case C-4/94) [1995] BVC 159
C & E Commrs v Redrow Group plc VAT[1999] BVC 96
C & E Commrs v Reed Personnel Services Ltd VAT[1995] BVC 222
C & E Commrs v Robert Gordon's CollegeVAT[1996] BVC 27
C & E Commrs v Thorn Materials Supply Ltd VAT[1998] BVC 270
Direct Cosmetics Ltd v C & E Commrs VAT(Case 138/86) (1988) 3 BVC 354
Eastbourne Town Radio Cars Association v C & E CommrsVAT[1998] BVC 197
Fischer v Finanzamt Donaueschingen VAT(Case C-283/95) [1998] BVC 431
Institute of Chartered Accountants in England and Wales v C & E Commrs VAT[1999] BVC 215
IR Commrs v Willoughby TAX[1997] BTC 393
Lupton v FA & AB Ltd ELR[1972] AC 634
Marleasing SA v La Comercial Internacional de Alimentación SA(Case C-106/89) [1990] ECR I-4135
Mol v Inspecteur der Invoerrechten en Accijnzen VAT(Case 269/86) (1989) 4 BVC 205
Thomson v Gurneville Securities ELR[1972] AC 661
Vereniging Happy Family Rustenburgerstraat v Inspecteur der Omzetbelasting VAT(Case 289/86) (1989) 4 BVC 216
Wellcome Trust Ltd v C & E Commrs VAT(Case C-155/94) [1996] BVC 377
Tax avoidance - Partially exempt company with restricted input tax recovery - Construction of buildings - Whether scheme using wholly-owned subsidiaries to mitigate input tax restriction was entered into solely for the purposes of tax avoidance - Whether transactions designed to incur input tax in subsidiary company qualified as supplies of construction services - Directive 77/388, the sixth VAT directive, art. 2 and 4.
The three appellants were companies within The Halifax plc corporate group, each being registered on its own account for VAT. Country Wide Property Investments Ltd (CWPI) and Leeds Permanent Development Services Ltd (LPDS) appealed against decisions of the commissioners to disallow claims for input tax credit. The Halifax appealed against the decisions in so far as they operated to treat it as having received taxable supplies of construction services which, The Halifax claimed, should have been treated as supplies to CWPI.
The facts leading to the appeal were that The Halifax had made a decision to construct call centres at sites in Northern Ireland, Scotland and North-East England. Because The Halifax was a bank, its supplies were for the main part exempt from VAT and at the relevant time it was able to recover no more than five per cent of its input tax. In order to avoid a substantial loss of input tax on the construction works, the appellants utilised a scheme whereby The Halifax would grant an interest in the development sites to a subsidiary, the first subsidiary. That company would then engage a second subsidiary to carry out the construction works, using subcontract builders, and would make payment shortly before the end of its own partial exemption year. In the same VAT period in which the payment was made, the first subsidiary would make a low-value standard-rated supply. At the end of the first subsidiary's partial exemption year, this taxable supply would be the only supply made in the year and the company would recover the VAT paid on the construction works. In its next partial exemption year, the first subsidiary would transfer its leasehold interests in the sites to a third subsidiary as exempt supplies and that company would, in turn, lease the sites back to The Halifax. For the scheme to be effective, certain conditions had to be satisfied: The Halifax and its first and second subsidiaries had to be separately registered for VAT; during the first subsidiary's partial exemption year its taxable outputs had to be as high a proportion of its total outputs as possible; and the property interests in the sites vested in the first subsidiary had to be designed so that they did not rank as capital items in order to avoid an adjustment to that company's input tax at the time when those interests were transferred to the third subsidiary.
The commissioners' first contention was that a transaction entered into for the purposes of tax avoidance was neither a supply for VAT purposes nor a step taken in the course of an economic activity, as those terms are construed in Directive 77/388, the sixth VAT directive. Thus, the undertakings of LPDS and CWPI in their respective roles as first and second subsidiaries were not supplies. In the same way, the undertakings of CWPI in respect of construction services carried out for LPDS were not supplies. The arrangements had no function other than to facilitate a solution to The Halifax's partial exemption problem. The commissioners' second submission was that transactions entered into solely for the purpose of tax avoidance should be disregarded under the general principle of EC law preventing abuse of rights. Instead, the terms of the sixth directive should be applied to the true nature of the transactions in issue. In the commissioners' view, the reality of the arrangements entered into by the appellants was that the only supplies of construction services were those of the builders taken on by CWPI, and the true recipient of the builders' supplies was The Halifax.
The appellants submitted that all the transactions forming part of the arrangements were genuine and resulted in genuine supplies being made. The supplies made by the appointed builders clearly served a commercial purpose and so, too, did the supplies of construction services by CWPI and the supplies of construction services and land by LPDS. Each company was to earn profits from its participation in the arrangements. The appellants conceded that the structures had been put into place in order to achieve a tax advantage, but argued that the VAT system imposed a charge to tax on a transaction-by-transaction basis and that genuine transactions such as these could not be disregarded.
Held, dismissing the companies' appeals:
1. There was no business or commercial rationale for any of the transactions forming part of the scheme other than that they were required in order for the scheme to work. Moreover, if the scheme did work it would cause distortions of competition at national and Community level in that it would give The Halifax an advantage in economic terms over competitors which did not adopt similar arrangements.
2. The scheme and every step in it were tax avoidance in the sense contemplated by the sixth directive.
3. The transactions were undoubtedly genuine, but each one played a key role in the tax avoidance scheme and owed its existence to that and to nothing else.
4. The nature and destination of the services supplied by the arm's length builders were to be determined from all the relevant considerations of which the paperwork was but one. The reality was that CWPI was not a link in the chain of supplies and that the supplies of construction services were made by the builders direct to The Halifax. Consequently, no taxable supplies were made by CWPI to LPDS or by LPDS to The Halifax.
5. It followed that VAT chargeable on the construction services supplied to The Halifax would be deductible in accordance with the input tax recovery rate allowed by the company's partial exemption method.
6. The appellants gained no rights from the scheme adopted and consequently had no rights to abuse. For that reason, it was unnecessary for the tribunal to consider the commissioners' argument that the transactions should be disregarded in accordance with the EC "abuse of rights" principle.
[The tribunal set out the facts summarised above and continued as follows.]
9. At the start of 2000, The Halifax owned the following land interest in the Sites [call centres]:
(i) a lease with about 125 years to run of land at Cromac Wood, Belfast ("the Cromac Wood Site")
(ii) a fee simple interest in land at Dundonald ("the Dundonald Site");
(iii) a fee simple interest in land at Livingston ("the Livingston Site"); and
(iv) the freehold in land at Leeds ("the Leeds Site").
10. The appeal proceeded, by prior agreement between the parties, almost entirely on a Statement of Agreed Facts which referred to agreed documents. The only area left to primary fact-finding by the tribunal related to the events that took place at board meetings of LPDS and CWPI (see para. 31-37 below).
11. The Halifax had, on 17 December 1999, contracted with Cusp Ltd, an arm's length property development and contracting company, for the development of the Cromac Wood Site. This is referred to "the Cusp Agreement".
12. The company taking the role of the first company in the solution was LPDS. The role of the second company was allocated to CWPI. Both were wholly owned subsidiaries of The Halifax: both had their own VAT registrations. The role of the third company was taken by Halifax Property Investment Ltd ("HPIL"), another wholly owned subsidiary of The Halifax; it was unregistered for VAT. The solution required the second company (CWPI) to contract with the arm's length builders, etc. for construction works. Consequently, The Halifax had first to be disengaged from the Cusp Agreement. This was achieved by a novation agreement dated Monday, 28 February 2000 ("the Novation Agreement") by which the Cusp Agreement was novated from that date so that The Halifax's rights and obligations became those of CWPI.
13A. The Halifax entered into three loan agreements ("the Initial Loan Agreements"), one for each of the Cromac Wood, the Dundonald and the Livingston Sites. Under these, The Halifax agreed to lend to LPDS up to the following amounts for the purposes of acquisition of an interest in and the development of the Sites. The total facility in respect of each Site was:
Cromac Wood - £32m
Dundonald - £9M
Livingston - £18M
LPDS...
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