Revenue and Customs Commissioners v Newey (t/a Ocean Finance)
| Jurisdiction | England & Wales |
| Judge | Peter Jackson LJ,Patten LJ,Lord Justice Henderson |
| Judgment Date | 17 April 2018 |
| Neutral Citation | [2018] EWCA Civ 791 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2015/2717 |
| Date | 17 April 2018 |
[2018] EWCA Civ 791
Lord Justice Patten
Lord Justice Henderson
and
Lord Justice Peter Jackson
Case No: A3/2015/2717
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL (TAX AND CHANCERY CHAMBER)
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Owain Thomas QC and Ms Isabel McArdle (instructed by the General Counsel and Solicitor to HMRC) for the Appellants
Mr Julian Ghosh QC, Ms Elizabeth Wilson and Mr Jonathan Bremner (instructed by Ashurst LLP) for the Respondent
Hearing dates: 30 & 31 January 2018
Judgment Approved
Introduction
The basic issue on this appeal is whether the EU law doctrine of abuse of law applies in circumstances where the respondent taxpayer, Mr Newey, who had previously carried on a successful loan-broking business in partnership in the United Kingdom under the trading name of “Ocean Finance”, took steps to incorporate and restructure the business in Jersey, outside the EU and outside the normal territorial scope of value added tax (“VAT”).
The partnership's business had never been registered for VAT, because the only supplies which it made in the UK were of exempt financial services. The business nevertheless bore a substantial burden of VAT on supplies of services and goods made to it for the purposes of the business, including in particular supplies of advertising services which were targeted at potential customers for loans. Because Ocean Finance carried on its business as an “exempt trader”, the supplies which it made to its customers (who were third party lenders) generated no output tax against which the tax which it paid on supplies attributable to its business could be set off as input tax. Accordingly, the tax which Ocean Finance paid to its own suppliers, notably in respect of advertising, represented an irrecoverable cost of its business.
It is common ground that the sole reason why Mr Newey took steps to incorporate and restructure the business of Ocean Finance in Jersey was to eliminate this burden of irrecoverable input tax. Under the new arrangements, which were put in place by him on the advice and with the assistance of a firm of chartered accountants (Moore Stephens), the business was (at least ostensibly) then carried on by the Jersey-registered company and its directors (who deliberately did not include Mr Newey), and the necessary advertising services were supplied to that company by another Jersey company, the intention being that no VAT could be chargeable in respect of those services because they would fall outside the scope of the relevant place of supply rules. In other respects, however, the business continued to operate on the ground much as before. The loan-broking services were still provided to third party lenders in the UK, in respect of loans made to UK-resident customers recruited through advertising which was placed only in the UK. The work of processing loan applications was still carried out by Mr Newey and his team at their UK premises in Staffordshire, although these services were now provided by Mr Newey to his Jersey company under a Services Agreement. The business also continued to trade under the name of Ocean Finance, which Mr Newey permitted the company to use.
Against this background, the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) eventually assessed Mr Newey to VAT for the period from 1 July 2002 to 31 December 2004 in the sum £10,707,075. This tax was said to be due in respect of advertising services provided by the Jersey-based advertising company (Wallace Barnaby & Associates Ltd, “Wallace Barnaby”) to the Jersey company which carried on the Ocean Finance business (Alabaster (CI) Ltd, “Alabaster”). HMRC sought to justify the assessment on two alternative grounds. First, they argued that the position as a matter of VAT law was that Mr Newey, not Alabaster, was the supplier of the loan-broking services, with the consequence that the advertising services had to be treated as supplied to him. On that footing, a reverse charge would arise on Mr Newey under section 8 (1) of the Value Added Tax Act 1994 (“ VATA 1994”). This charge would be attributable to exempt supplies of loan-broking services made by him in the UK, and thus not recoverable as input tax. Alternatively, if the supplies of advertising services were made to Alabaster and not to Mr Newey, the scheme viewed as a whole constituted an abuse of law under EU law, which should be countered by treating Mr Newey as receiving supplies of advertising services and using them to make exempt supplies of loan-broking services in the UK.
Mr Newey appealed, and in due course his appeal was heard by the Tax Chamber of the First-tier Tribunal (Judge Berner and Mrs Neill) (“the FTT”) over 5 days in February 2010. By its decision released on 23 April 2010 (“the FTT Decision”), the FTT allowed Mr Newey's appeal. The FTT held, in short, that on a proper consideration of all the facts it was Alabaster, not Mr Newey, which made the loan-broking supplies and was the recipient of the supplies of advertising services; and that the doctrine of abuse of law had no application, because although the essential aim of the scheme had been to obtain a tax advantage, the establishment of Alabaster in Jersey was not itself abusive unless its functions or activities were such as to be contrary to the purposes of the VAT legislation, and on the facts that test was not satisfied. In reaching this conclusion, the FTT applied the law on abuse of law in accordance with its understanding of the principles laid down by the Court of Justice of the European Communities (“the CJEU”) in the Halifax case (Case C-255/02, Halifax Plc and others v Customs and Excise Commissioners, ECR I-1609, [2006] Ch 387, [2006] STC 919) and by the Court of Appeal in WHA Ltd v Revenue and Customs Commissioners [2007] EWCA Civ 728, [2007] STC 1695.
HMRC then appealed to the Tax and Chancery Chamber of the Upper Tribunal, but also made an application (to which Mr Newey consented) for a reference to be made to the CJEU for a preliminary ruling. An order for reference was accordingly made on 13 December 2011, seeking guidance from the CJEU on the correct approach to the interpretation of a “supply” for the purposes of the Sixth Directive, and in particular (a) the extent to which national courts are required to attach significance to a contractual analysis in determining who makes a supply of services for VAT purposes, and (b) if the correct analysis under the Sixth Directive is that a person such as Alabaster is the supplier of loan-broking services and the recipient of advertising services, whether the scheme entered into by Mr Newey and Alabaster with the sole aim of obtaining a tax advantage was contrary to the scheme and purpose of the Sixth Directive in accordance with the principle of abuse of law: see the order for reference at paragraph 90, and the six specific questions set out in paragraph 91.
The Third Chamber of the CJEU delivered its judgment on 20 June 2013, having decided to proceed to judgment without an opinion of the Advocate General. I will need to return later to the detailed reasoning of the Court, but for now I will quote the dispositif in which the Court formulated its conclusion on the first four of the questions referred (which it had considered together):
“Contractual terms, even though they constitute a factor to be taken into consideration, are not decisive for the purposes of identifying the supplier and the recipient of a “supply of services” within the meaning of arts 2(1) and 6(1) of [ the Sixth Directive]. They may in particular be disregarded if it becomes apparent that they do not reflect economic and commercial reality, but constitute a wholly artificial arrangement which does not reflect economic reality and was set up with the sole aim of obtaining a tax advantage, which it is for the national court to determine.”
With the benefit of this guidance, the resumed hearing of HMRC's appeal took place before the Upper Tribunal (Warren J) on 4 and 5 November 2014. By its decision released on 2 June 2015 (“the UT Decision”), the appeal was dismissed. The UT Decision runs to 260 paragraphs, and is not easily summarised. In outline, however, the Upper Tribunal expressed some criticisms of the reasoning by which the FTT had reached its conclusion on one limb of the Halifax test, but nevertheless concluded that the FTT had been entitled to reach the conclusions which it did on the basis of the facts which it found. The Upper Tribunal rejected HMRC's case that the Alabaster arrangements were “wholly artificial” and thus contrary to the purpose of the Sixth Directive. In a key passage of its discussion of the abuse issue, the Upper Tribunal said:
“244. …Although [ the FTT] did not say so in so many words, they considered that the Alabaster arrangements did reflect an economic and commercial reality which did not produce a result contrary to the purpose of the Sixth Directive. Had they expressed their conclusion in the language of the CJEU Judgment, it is clear, in my view, that they would have concluded that the arrangements were not wholly artificial arrangements which did not reflect economic and commercial reality. It is not just that I consider this is what they would have said: I perceive what they actually said as inconsistent with a contrary conclusion.
245. Can the Tribunal's conclusion on abuse nonetheless be overturned on the basis of the errors which HMRC allege? In this context, the question is not whether I would have reached the same conclusion but whether the evaluation of the Tribunal in the light of the unchallenged findings of primary fact displays an error of law.
246. Although HMRC have...
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