Pendragon Plc and Others v The Commissioners for HM Revenue and Customs

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice Lloyd,Lord Justice Lewison,Lady Justice Gloster
Judgment Date23 July 2013
Neutral Citation[2013] EWCA Civ 868
Date23 July 2013
Docket NumberCase No: A3/2012/1529

[2013] EWCA Civ 868





[2012] UKUT 90 (TCC)


Judge Adrian Shipwright And Sheila Wong Chong Frics

[2009] Ukftt 192 (tc)

Royal Courts Of Justice

Strand, London, Wc2a 2ll


Lord Justice Lloyd

Lord Justice Lewison


Lady Justice Gloster

Case No: A3/2012/1529

(1) Pendragon Plc
(2) Stripestar Ltd
(3) Pendragon Company Car Finance Ltd
(4) Pendragon Demonstrator Finance Ltd
(5) Pendragon Demonstrator Finance November Ltd
(6) Pendragon Demonstrator Sales Ltd
The Commissioners for her Majesty'S Revenue and Customs

Roderick Cordara Q.C. and Ms Valentina Sloane (instructed by KPMG) for the Appellants

Nigel Pleming Q.C. and Owain Thomas (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents

Hearing Dates: 29 And 30 April And 1 May 2013

Approved Judgment

Lord Justice Lloyd

Introduction and summary


This appeal is brought against a decision of the Upper Tribunal (Tax and Chancery Chamber) by which an appeal by HMRC was allowed against a decision of the First-Tier Tribunal (Tax Chamber) in favour of the present appellants. The First-Tier Tribunal (Judge Adrian Shipwright and Sheila Wong Chong FRICS) held on 31 July 2009, after a hearing lasting 8 days, that the arrangements entered into by the present appellants (whom I will call the Pendragon Group, or Pendragon for short) did not involve conduct falling within the European law principle of abuse of right. On that basis it set aside assessments and misdeclaration penalties imposed by HMRC. On 29 November 2011 the Upper Tribunal (Mr Justice Morgan and Judge Colin Bishopp) allowed an appeal by HMRC, holding that the arrangements did involve abuse of right, and reinstated the assessments. The appellants appeal with permission granted by Lewison LJ.


The Pendragon Group is said to be the largest car sales group in Europe. Its principal areas of business are the sale of new and used cars. For the purposes of this appeal the important part of its business is the sale of demonstrator cars. These are cars which potential customers are invited to use to test drive on the road, and the phrase also includes loan or courtesy cars which are lent to customers for repair services while their own vehicles are being repaired. The demonstrator cars in question were all being driven on the road for a number of months, and they counted as used cars by the time that, having ceased to be used in the business as demonstrator cars, they were offered for sale to the public. As the Pendragon Group bought these cars new and sold them as used cars, the profit margin would be either non-existent or very low.


The practice of using cars as demonstrator cars in this way, which is normal in the relevant trade, affects the economics of the car dealer's operation not only as regards the effect on the resale price. A car dealer's stock of cars requires funding in any event, since it has to pay the manufacturer on purchase but has to wait until a sale to a purchaser in order to realise the value of the vehicles. As regards demonstrator cars, all the more time will elapse between purchase and eventual sale by the dealer. The requirement of finance for the dealer's operations is an ever-present factor.


In accordance with normal principles of VAT, tax would ordinarily be payable on the sale of demonstrator cars by reference to the full amount of the sale price. When the Pendragon Group bought a car new from the manufacturer, VAT would be charged on the full price. This would be the input VAT suffered by the purchaser, which would in due course be recovered by set-off against output tax for which the purchaser would be accountable on its sales and other supplies. However, special provision is made in the VAT legislation for sales of second hand goods, in some circumstances, so that they may be taxed on a different basis, namely on the profit margin. This is known as the margin scheme. Conditions laid down in legislation must be met for it to apply, but even if they are met it is a matter of choice for the relevant taxable person as to whether it shall apply.


The appeal concerns a scheme which involved the use of the margin scheme by the eventual seller of the used cars, but also involved the recovery in full of the input tax incurred on the original purchase of the new cars. I will set out the details shortly, but I will refer to it as the Scheme. It was devised by KPMG, and was put into operation by Pendragon on two occasions, involving substantial sums of money and substantial numbers of cars each time.


HMRC contend that the Scheme was wholly artificial, did not reflect economic reality and was set up with the sole or essential aim of obtaining a tax advantage of a kind which was illegitimate, that is to say one which was inconsistent with the policy of the relevant legislative provisions. That advantage was that the Pendragon Group was able to recover all of the input tax incurred on the purchase of the cars from the manufacturer, but was able to apply the margin scheme to the eventual sale of the cars to a retail purchaser. The First-Tier Tribunal did not accept this contention, holding that the essential aim of the transactions was to obtain finance, but the Upper Tribunal held that the FTT had erred in law in this respect, and that the essential aim was to obtain an illegitimate tax advantage. The principal question on the appeal to this court is whether, in doing so, the Upper Tribunal went beyond what is properly open to an appellate court or tribunal where facts have been found and evaluated by the court or tribunal from which the appeal is brought.


As in the Upper Tribunal, the case was argued by Mr Cordara Q.C. leading Ms Sloane for Pendragon and by Mr Pleming Q.C. leading Mr Thomas for HMRC, all of whom (apart from Mr Thomas) had also appeared before the First-Tier Tribunal. I am grateful to them for their assistance in a case which is complex as regards both the relevant law and the factual and procedural history.


For the reasons which I set out below, at inordinate length which I regret, I have come to the conclusion that the First-Tier Tribunal was entitled to come to the conclusion that it reached and that the Upper Tribunal was wrong to reverse the decision. I would therefore allow the appeal.

VAT: the legislation in general, and the policy


The essential basis of VAT was set out in article 2 of the First Council Directive on VAT, 67/227/EEC:

"The principle of the common system of value added tax involves the application to goods and services of a general tax on consumption exactly proportional to the price of the goods or service, whatever the number of transactions which take place in the production and distribution process before the stage at which tax is charged.

On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.

The common system of value added tax shall be applied up to and including the retail trade stage."


In the normal way, when the manufacturer of a new product such as a motor car sells it, it will charge VAT on the price (referred to as output tax), and will account for that to HMRC after deducting tax paid on supplies made to it (input tax), including that on supplies of goods and services made to it and referable to the process of manufacture. Assuming that the sale is not itself a retail sale, but is to another trader (such as the Pendragon Group in the case of cars), that trader will charge VAT when it sells the car on, and will deduct, against that and other VAT charged by it on the supplies which it makes, the input tax charged to it on supplies made to it, including on the purchase of the car. If and when the goods are sold to a purchaser who is not a taxable person, such as an ordinary retail purchaser, then that person suffers VAT, as it is charged on the sale to him, but he cannot recover it because he makes no taxable supplies (or no relevant such supplies) on which he charges VAT from which he can deduct the VAT charged to him on the purchase of the car. That is the point at which VAT is finally charged and paid so that the full amount of tax is received by HMRC. I need not refer to the detail of the European legislation by which this principle was promulgated, nor to that of its implementation in the UK by the Value Added Tax Act 1994 ( VATA).


Where that system applied in the ordinary way to the process by which the Pendragon Group bought and sold motor cars, a company within the group would suffer VAT (input tax) on the purchase of a new car from a manufacturer (let us say, for illustration purposes, Ford), it would charge VAT (output tax) on the sale to a purchaser at a price which, assuming the car is still new and subject to the state of the market, should be higher than the price paid to Ford, and it would deduct the input tax incurred by it on the purchase against the output tax charged by it on the sale, leaving it, it would hope, with a balance in its favour on the transaction as a whole, having recovered by deduction (or by repayment from HMRC) the input VAT which it incurred.


In the case of a car which a Pendragon company uses for a time as a demonstrator car before selling it, the price on the ultimate sale to a retail buyer is likely...

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