WHA Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Lord Neuberger of Abbotsbury,Lord Justice Latham,Lord Justice Waller |
| Judgment Date | 17 July 2007 |
| Neutral Citation | [2007] EWCA Civ 728 |
| Docket Number | Case No: C3/2003/1412 |
| Court | Court of Appeal (Civil Division) |
| Date | 17 July 2007 |
[2007] EWCA Civ 728
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM The Chancery Division of the High Court
Mr Justice Lloyd
CH2002AP0400
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Waller
Vice-President of the Court of Appeal, Civil Division
Lord Justice Latham and
Lord Neuberger of Abbotsbury
Case No: C3/2003/1412
Roderick Cordara QC (instructed by Messrs Deloitte & Touche) for the Respondent
Jonathan Peacock QC and Aidan Robertson (instructed by HM Revenue and Customs) for the Appellant
Hearing dates : 20th, 21st June 2007
Judgement
Introductory
On 14 May 2004, we handed down our judgments in relation to a scheme (“the Scheme”) which was claimed to have the effect of minimising overall liability to VAT in the context of the supply of repairs and parts provided pursuant to contracts of motor breakdown insurance (“MBI”). The matter came before us as the first part of an appeal from a decision of Lloyd J. He had allowed an appeal by the taxpayers against the decision of the VAT and Duties Tribunal (“the Tribunal”), in favour of the Commissioners for Customs and Excise, now Her Majesty's Revenue and Customs (“HMRC”). In effect, we held, in part for different reasons from Lloyd J, that the Scheme had the effect for which the taxpayers contended. That decision is reported at [2004] STC 1081.
As I have mentioned, that decision concerned only the first part of the appeal. As I explained in paragraph [4] of my earlier judgment (with which Waller and Latham LJJ agreed), the arguments before us, and our decision, were subject to certain further arguments raised by HMRC “based on the alleged artificiality of the Scheme, including a contention based on abuse of rights (or abus de droit)”. Those arguments give rise to the issues raised on the second part of the appeal, which now have been considered at a further hearing and are the subject of this judgment.
In paragraphs [2] and [3] of my earlier judgment the Scheme was described in these terms:
“MBI policies are issued to members of the public by an English company, [NIG]… . NIG reinsures its liabilities under these policies with a Gibraltar based company called [Crystal] which in turn retrocedes 85% of the reinsurance to another Gibraltar based company, Viscount. Viscount contracts with an English company, WHA, to instruct garages to carry out any works required to be effected under the policies, and to pay for those works… . On each occasion that such work is carried out by a garage … on WHA's instructions, the garage renders an invoice to WHA. It is common ground that VAT is payable on this invoice. The effectiveness of the Scheme primarily depends on WHA being able to treat this VAT as input tax. WHA renders an invoice to Viscount which WHA contends is exempt from VAT. If that contention is correct, WHA is able to claim repayment from [HMRC] of the input tax. Alternatively, if WHA is wrong and VAT is chargeable on its invoice to Viscount, then Viscount contends that it is entitled to recover the VAT it has to pay in respect of the invoice from WHA.”
The Scheme was explained in more detail, together with some further relevant facts found by the Tribunal, in paragraphs [5] to [23] of my earlier judgment. I do not propose to set out the contents of those paragraphs again; they may be treated as incorporated into this judgment. However, it is appropriate for present purposes to identify or emphasise certain aspects of the Scheme (some of which are in the passage quoted from my earlier judgment), as they are highly relevant to the issues which we now have to determine.
First, WHA, Viscount and Crystal are and always have been part of the same group of companies. WHA is a wholly owned English subsidiary of an entity called Oriel, itself an English company. Oriel also owns all the shares in another English company called Warranty, which in turn owns all the shares in a Gibraltar company called Practical, of which both Crystal and Viscount are wholly owned Gibraltar subsidiaries. Secondly, under the Scheme, NIG's insurance liabilities to motorists with MBI policies are 100% reinsured by Crystal, which in turn retrocedes 85% of its reinsurance liability to Viscount. Thirdly, under the Scheme, claims handling and contracts with garages for repair works and parts (“claims handling”) are, as it were, subcontracted by NIG to Crystal, and by Crystal to Viscount, and, finally, by Viscount to WHA.
Fourthly, the Scheme was set up in 1998, and replaced an earlier arrangement, under which NIG's liability under the MBI policies was 100% reinsured by Practical, which in turn retroceded 100% of its liability to Warranty, and the claims handling was subcontracted by NIG directly to Warranty. Thus, the two main differences between the Scheme and the predecessor arrangement were (a) the involvement of a second Gibraltar company (Viscount) as an 85% retrocedent rather than the English claims handler (Warranty/WHA) as a 100% retrocedent, and (b) a claims handling contractual “chain” (through what the Tribunal called the “Gibraltar loop”), which included Viscount, from NIG to the ultimate claims handler (WHA), as opposed to a direct contract between NIG and the claims handler (Warranty).
As already explained, the first part of the appeal was argued in 2004 on the basis that the Scheme should be accepted at what one might call face value, that is on the assumption that the documentation embodying the Scheme was valid and effective for all purposes. Accordingly, the questions we had to consider in 2004 involved determining the VAT consequences on that basis. In accordance with well established principles, it was therefore necessary to consider each step in the Scheme individually—see in this connection the observations of Lord Hoffmann in Customs and Excise Commissioners v Robert Gordon's College [1995] STC 1093 at 1099, and paragraph 29 of the opinion of the Advocate-General in Optigen Ltd v Customs and Excise Commissioners (Joined cases C 354/03, C355/03 and C 484/03) [2006] STC 419.
The effect of our decision, as summarised in paragraph [157] of my earlier judgment, was as follows. (i) WHA and Viscount (“the respondents”) succeeded in their argument that there was a supply of services to WHA by the garages, and that the VAT payable by WHA was therefore input tax capable, at least in principle, of being recoverable; (ii) WHA failed in its argument that it made no taxable supply of services to Viscount; (iii) Viscount succeeded in its argument that it was entitled to recover the input tax it had to pay WHA. Accordingly (subject to the issues which have now been argued before us) we concluded that, although WHA was not entitled to recover the input tax it paid to the garages, as it had failed on point (ii), the Scheme succeeded in minimising overall liability to VAT, as Viscount was entitled to recover the input tax it paid to WHA, in the light of its success on point (iii). Thus, we held that (subject to the issues which now fall to be determined), to put it slightly over-simply, the VAT paid by one member of the Oriel group, WHA, on the repair works and parts provided by the garages, could be recovered by Viscount, another member of the group.
The issue which now has to be decided is whether the Scheme should be struck down, or, to put it more accurately, “redefined”, on the basis that it, or one or more of the steps, or transactions, involved in it, amounts to an “abusive practice”, as recently and authoritatively discussed and explained by the Grand Chamber of the European Court of Justice in Halifax plc v Customs and Excise Commissioners (Case C 255/02) [2006] 2 WLR 905. In that case, the European Court made two important rulings in relation to schemes whose purpose was to avoid or mitigate liability to VAT. First, that a transaction entered into solely for that purpose “and without any other economic objective” can constitute a supply of goods or services, and an economic activity (see paragraph [60]). Secondly, that the concept of abusive practice is applicable in the field of VAT (see paragraph [85]).
Both rulings of the European Court in Halifax are relevant to the present dispute. The first has caused HMRC to abandon certain of the arguments it had raised (unsuccessfully) before the Tribunal, and it is therefore unnecessary to consider that aspect of Halifax further. The second ruling is central to the issue we have to decide. The kernel of the European Court's decision in relation to its second ruling is to be found in the following conclusions:
“[85] …[T]he Sixth Directive must be interpreted as precluding any right of a taxable person to deduct input VAT where the transactions from which that right derives constitute an abusive practice.
[86] For it to be found that an abusive practice exists, it is necessary, first, that the transaction 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. Secondly, 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.
…..
[94] … [T]ransactions involved in an abusive practice must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.”
As just mentioned, the decision in Halifax has...
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