Commissioners for HM Revenue and Customs v Pendragon Plc and Others

JurisdictionEngland & Wales
CourtSupreme Court
JudgeLord Reed,Lord Neuberger,Lord Carnwath,Lord Sumption,Lord Hodge
Judgment Date10 June 2015
Neutral Citation[2015] UKSC 37
Date10 June 2015

[2015] UKSC 37


Trinity Term

On appeal from: [2013] EWCA Civ 868


Lord Neuberger, President

Lord Sumption

Lord Reed

Lord Carnwath

Lord Hodge

Commissioners for Her Majesty's Revenue and Customs
Pendragon plc and others


Nigel Pleming QC Owain Thomas

(Instructed by HMRC Legal Department)


Roderick Cordara QC Valentina Sloane

(Instructed by KPMG LLP)

Heard on 11 and 12 March 2015

Lord Sumption

(with whom Lord Neuberger, Lord Reed, and Lord Hodge agree)


This appeal is about an elaborate scheme designed and marketed by KPMG relating to demonstrator cars used by retail distributors for test drives and other internal purposes. In the ordinary course, a car distributor will buy new cars for use as demonstrators, paying VAT on the full amount of the sale price. This will in due course be recoverable as input tax by being set off against the output tax for which the distributor was accountable on its taxable supplies. The object of the KPMG scheme was to ensure that companies in the distributor's group were able to recover input tax paid on the price of new cars acquired as demonstrators from manufacturers, while avoiding the payment of output tax on the price at which the car was ultimately sold second-hand to a consumer. The Pendragon Group, to which all the respondents belong, are the largest car sales group in Europe. They purchased the Scheme and used it on two occasions, once in November and December 2000 and again in February and March 2001. Further use of the scheme was then abandoned when its efficacy was challenged by the Commissioners. In this litigation, the Commissioners seek to recover the VAT which the Pendragon Group thereby avoided.

The KPMG scheme

The KPMG scheme was designed to exploit three exceptions to the normal incidence of VAT. The first was an exception for assignments by an owner of goods comprised in a hire purchase or conditional sale agreement of his rights and interests thereunder and the goods comprised therein to a bank or other financial institution. Such transactions were "de-supplied" by article 5(4) of the Value Added Tax (Special Provisions) Order 1995, SI 1995/1268. In other words, they were to be treated as neither a supply of goods nor a supply of services, and were thereby taken out of the VAT legislation altogether. The second exception was an exception for the supply by a person of assets of his business as part of the transfer of that business (or some discrete part of it) as a going concern, to be used by the transferee in carrying on the same kind of business. Such transactions were "de-supplied" by article 5(1) of the same Order. The third exception was the margin scheme under which dealers in second-hand goods are allowed to charge VAT not on the whole consideration for the sale of the goods but on their profit margin only. Margin schemes apply to the sale of second-hand goods, works of art, collectors' items and antiques. They are authorised by article 26a of the Sixth Council Directive on the Harmonisation of the Laws of member states relating to Turnover Taxes 77/388/EEC (as amended). Article 26a was inserted by amendment by Council Directive 94/5/EC in 1994. In the United Kingdom, effect was given to the amendment so far as concerned used cars by article 8 of the Value Added Tax (Cars) Order 1992, SI 1992/3122, as amended by the Value Added Tax (Cars) (Amendment) Order 1997, SI 1997/1615.


The KPMG scheme involved five prearranged steps. I gratefully adopt the summary by Lloyd LJ in the Court of Appeal of these steps, and their normal consequences for the incidence of VAT [2013] EWCA Civ 868; [2014] STC 844:

"21. Step 1. Pendragon plc, having bought new cars from, say, Ford, sold new cars which were destined for use as demonstrator cars, before sale to a consumer, to Captive Cos 1, 2, 3 and 4 ('the Captive Leasing Companies' or CLCs). (In fact only three companies were used, but I use the language which has been used elsewhere to describe the Scheme, in order not to generate unnecessary confusion.) Pendragon plc's sale of the cars to a CLC was a taxable supply of goods for VAT purposes. Therefore, Pendragon plc accounted for output tax on the sale of the cars; and reclaimed input tax, including the tax incurred on the purchase from Ford.

22. Step 2. On the same day as Step 1, the Captive Leasing Companies leased the cars pursuant to hybrid HP/lease agreements to dealership companies in the Pendragon Group ('the Dealerships'). Each of the Captive Leasing Companies entered into a 'Vehicle Demonstrator Hire Agreement' (referred to as a hybrid lease) in favour of the Dealerships. Paragraph 8(c) of Second Schedule to the hybrid leases (generally referred to as clause 8(c), as I will refer to it hereafter, so as to avoid confusion) conferred on the Dealership an option to purchase the hired vehicles. The option was exercisable seven days after the end of the hire agreement, and not earlier.

23. The services provided by the Captive Leasing Companies to the Dealerships under the Vehicle Demonstrator Hire Agreement were taxable supplies at the standard rate of VAT. Input tax incurred by the Captive Leasing Companies on the purchase of the vehicles from Pendragon plc at Step 1 was therefore fully recoverable, being attributable to the making of those taxable supplies of leasing to the Dealerships. The Dealerships incurred VAT on the rental payments but recovered that VAT in full, being attributable to their taxable sale activities.

24. Step 3. On the day following Steps 1 and 2, the Captive Leasing Companies began assigning the hybrid lease agreements and title in the cars to SG Hambros Bank and Trust (Jersey) Ltd, known in the case as Soc Gen Jersey (SGJ), which was resident in Jersey, not in the UK. Each of the Captive Leasing Companies entered into a Deed of Assignment with SGJ. SGJ paid the Captive Leasing Companies the sum of approximately £20m. On the same date, SGJ had entered into a facility agreement with its parent company in the UK, SG London, in relation to the facility of £20m to finance the assignments. SGJ granted SG London an assignment of the assets to be assigned to it, as a form of security.

25. This step was critical to the success of the Scheme. It depended on the assignment of a lease, granted by a Captive Leasing Company to a Pendragon dealership, to a bank; according to HMRC this had to be an offshore bank, as it in fact was. No VAT was due on this transaction. The assignment by the Captive Leasing Companies to SGJ was not a supply for VAT purposes, by virtue of article 5(4) of the Special Provisions Order, which "de-supplied" it, ie treated it as neither a supply of goods nor a supply of services.

26. Step 4. On a date envisaged as being some 30 to 45 days later, SGJ transferred as a going concern the lease agreements and title in the cars to Captive Co 5. Captive Co 5 resolved to purchase the relevant 'hire business' carried on by SGJ. On the same day, SGJ contracted with Captive Co 5 to sell to it the business of the hire of cars said to have been carried on by SGJ. The consideration was in excess of £18m and was apportioned as to £100,000 for the sale of goodwill and as to the balance (save for £2) for the sale of the motor vehicles. That agreement was completed on the same date, and Captive Co 5 paid the agreed price to SGJ.

27. The sale by SGJ to Captive Co 5 of its 'hire business' was the transfer of a business as a going concern (TOGC). As such the transaction was neither a supply of goods nor a supply of services; therefore no VAT was due on this transaction.

28. Step 5. On various dates thereafter, the cars were sold to customers by the Dealerships, acting as undisclosed agents for Captive Co 5 in which title to the vehicles was vested. VAT was charged to the purchasers on the seller's profit margin on the sale, rather than on the total sale price, Captive Co 5 having opted to apply the margin scheme.

29. When Captive Co 5 sold the vehicles to the retail customer, the Cars Order applied. The tax relief provided for by article 8 of that Order applied only where the taxable person making the sale had come into possession of the car in the circumstances set out in article 8(2), which I will set out below. If those requirements were met, and if the option was exercised that the margin scheme should apply, then VAT was due only on the profit margin on the supply, rather than on the whole value received for the supply. This meant that Captive Co 5 accounted for VAT on the difference between the cost of the car on the purchase from SGJ, and the price at which it sold the car to the consumer. By means of the de-supplied assignment of the leases to SGJ at Step 3, and the TOGC from SGJ at Step 4, the Scheme was designed to meet the taxation requirements of the Cars Order."

Abuse of law

It is common ground that at a purely technical level, the KPMG scheme worked. That is to say, the transactions envisaged at Steps 3 and 4 satisfied all the statutory conditions for exemption from VAT, and the transaction envisaged at Step 5 satisfied all the statutory conditions for the application of the margin scheme. But that is not the end of the matter. Value Added Tax is an EU tax imposed pursuant to successive Directives of the European Union, at the relevant time the Sixth Directive. The Directives are subject to the principle of abuse of law. By virtue of section 2(1) of the European Communities Act 1972 the same principle must apply to domestic legislation implementing the Directives.


Abuse of law is a concept derived from civil law jurisprudence, which is unknown to English common law but has been adopted by the law of the European Union. In its simplest form, it confines the exercise of legal rights to the purpose for which they exist, and precludes their use for a...

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