Wilmslow Financial Services Plc ((in Administration))
| Jurisdiction | UK Non-devolved |
| Judgment Date | 05 June 2020 |
| Neutral Citation | [2020] UKFTT 516 (TC) |
| Date | 05 June 2020 |
| Court | First-tier Tribunal (Tax Chamber) |
[2020] UKFTT 516 (TC)
Judge Jennifer Dean
Mr Gibbon, Omnis VAT Consultants Ltd, appeared for the appellant
Ms McArdle, Counsel instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Scheme to avoid irrecoverable input tax on supplies of advertising services to loan broking business – Establishment of loan broking business in Jersey with processing services provided by UK business – Whether advertising services supplied to UK business – Whether UK business made supplies of loan broking services – Whether scheme an abuse of law – Yes – Appeal dismissed.
The FTT held that a VAT planning scheme implemented by the appellant was ineffective. The appellant sought to argue that it was providing taxable processing services to a loan broking business established in Gibraltar and was not itself providing exempt loan broking services. The FTT determined that appellant was making the exempt supplies and was therefore unable to recover VAT incurred on, inter alia, its advertising expenditure. It also concluded that the arrangements were abusive.
This appeal related to assessments issued by HMRC disallowing input tax claimed by the appellant in the period 11/00 to 08/09.
Very briefly, until 1997 Wilmslow traded as a supplier of VAT exempt loan broking services in the UK. In 1997, on advice of its accountants and in order to reduce its irrecoverable VAT costs, it entered into an arrangement with a Gibraltar company, Karakus. Under the arrangement Karakus would provide loan broking services to clients in the UK. Among other activities, Karakus purchased advertising services for those products. The supplier of the advertising services was a non-UK company.
HMRC took the view that Wilmslow had entered into an abusive VAT planning arrangement. Its view was that Wilmslow was providing loan broking services, not Karakus, and that it had received the advertising services. Wilmslow was therefore required to account for (irrecoverable) UK VAT on those advertising services under the reverse charge.
The FTT determined that there were two issues for it to decide:
- Characterisation of the supplies and a determination of who supplied them: and
- Whether there had been an abuse of law.
The appeal had been stayed pending the outcome in Newey (t/a Ocean Finance) (which explains the length of time between the assessments and the hearing). Very briefly, Mr Newey had entered into similar arrangements to Wilmslow. After a reference to the ECJ (Case C-653/11) [2013] BVC 259, the Newey case was heard by the Court of Appeal [2018] BVC 19. The Court of Appeal made various findings on principle which were relevant to this case. (For completeness, as this was not relevant to the Wilmslow hearing, the Court of Appeal remitted the case back to the FTT. At the second hearing the FTT [2020] TC 07844 concluded that in Mr Newey's case the contracts between the parties did reflect the commercial and economic reality).
In relation to the characterisation of Wilmslow's supplies, the FTT reviewed previous case law including [1995] BVC 222 and WHA Ltd [2013] BVC 155. It concluded that “the principles to apply are” (para. 43):
- To consider the overall circumstances, including all parties involved;
- Not to view individual elements of the arrangements in isolation;
- To consider the contracts as relevant factors to take into account but which are not conclusively determinative of the issue;
- To consider all relevant factors such as whether commercial value is added by a party to the supply.
The FTT received a great deal of documentary evidence which is described at para. 51–167 of the decision, it included records of the advice provided Wilmslow's advisors which confirmed that the arrangements had been implemented as part of a planning scheme.
Applying the principles set out above the FTT concluded that it preferred HMRC's interpretation of the arrangements, as set out at para. 183 and 184:
[183] … I was satisfied that not only was the Agreement between the parties not arm's length but I also found that the terms of the Agreement did not reflect the commercial reality. The Agreement contained many terms which were uncommercial or lacked terms that would be expected. I was satisfied that the evidence demonstrating that the background leading up to the implementation of the arrangements was tax driven was relevant, albeit not determinative. That evidence, taken together with subsequent evidence confirmed that the sole reason to restructure the business so as to include Karakus in Gibraltar was to avoid irrecoverable VAT. I found that the arrangements were driven by the Appellant and [the advertiser] on the advice of a firm of tax advisers with the intention that Karakus would, on the face of it, carry on the business of loan broking with the arrangements providing for Karakus to appear to be a separate entity by features such as the appointment of Gibraltar based directors and payment by way of commissions to the Appellant.
[184] There was no evidence to support a finding that Karakus had the necessary resources to evaluate the applications processed by the Appellant nor was there any evidence to show that it ever evaluated or rejected any of the applications.
The FTT concluded (para. 198) that the loan broking services were supplied by Wilmslow and the advertising services were supplied to Wilmslow.
This conclusion was sufficient to dismiss the appeal but the FTT also considered HMRC's argument that the arrangement was abusive. The FTT considered the principles established by the ECJ in Halifax (Case C-255/02) [2006] BVC 377 and in the Newey case. The FTT noted that the fact that the arrangements had been implemented to reduce irrecoverable VAT costs did not automatically result in them being abusive. In Newey the ECJ “held that the effect of the principle of abuse of rights was to bar artificial arrangements which did not reflect economic reality and were set up with the sole aim of obtaining a tax advantage” (para. 203).
The FTT concluded that the arrangements were “highly uncommercial” and were therefore abusive for VAT purposes (para. 209). At para. 203 the FTT set out its reasoning thus:
I preferred the submissions on behalf of HMRC that the scheme was manifestly contrary to the purpose of VAT by virtue of its artificiality and abusive structure. The use of the special purpose vehicle in Gibraltar added expense to the business which was commercially unnecessary other than to obtain a tax advantage. The scheme required profits from the business to be used to cover the expenses of Karakus which performed none of the necessary elements of the loan broking business from a commercial perspective.
The contrasting outcomes of this case and that of Newey t/a Ocean Finance [2020] TC 07844 provide a vivid illustration of the importance of properly implementing VAT planning arrangements. Both taxpayers implemented similar arrangements to avoid irrecoverable VAT costs arising in a loan broking business but the FTT reached different conclusions on the success of those arrangements.
While the courts accept that taxpayers are fully entitled to organise their affairs in such a way that their tax burden is minimised, VAT is a tax on supplies and the VAT treatment of a supply is dependent upon “who is supplying what to whom”. In determining the nature of a supply any contracts between the parties must, if they are to be relied upon, accurately reflect the commercial and economic reality of the relationship. Unlike Newey whose planning arrangements were ultimately successful, Wilmslow failed to persuade the FTT that its written contracts did present a true picture of the underlying supplies.
[1] The initial appeal was made by Freedom Finance Limited in respect of assessments to VAT which disallowed input tax in periods 11/00 and 02/01. Thereafter HMRC notified further decisions to Freedom Finance Limited on the same grounds and which disallowed input tax and assessed for output tax for additional VAT accounting periods. 27 appeals in total were subsequently consolidated and the Appellant's name amended from Freedom Finance Limited to Wilmslow Financial Services Plc.
[2] The consolidated appeal by Wilmslow Financial Services plc (in administration) (hereafter “the Appellant”) concerns the disallowance of input tax and assessments for output tax for the period 11/00 to 08/09.
[3] I was not asked to determine the quantum of the assessment and therefore the Decision which follows is one of principle only at this stage.
[4] The delay in this case arises, in the main, from the appeal being stayed pending the outcome of the Court of Appeal's judgment in R & C Commrs v Newey (t/a Ocean Finance) [2018] BVC 19.
[5] The appeal concerns tax planning arrangements of the Appellant relating to its loan broking activities, which are exempt services for the purposes of VAT, and the use by the Appellant of a business structure involving a Gibraltar entity.
[6] The issues arising in the appeal can be summarised as follows:
- What is the proper characterisation of supplies of loan broking services; HMRC contend that the Appellant was the supplier and the Appellant contends that the Gibraltar entity, Karakus Limited (Karakus) was the supplier;
- Was the Appellant the recipient of advertising supplies or, as the Appellant contends, was Karakus the recipient of such supplies;
- Did the scheme amount to an abuse of law, as HMRC contends, by:Having a tax advantage as its essential aim; andBy virtue of its artificiality and/or by virtue of it being contrary to VAT legislation which provides that it is a tax on consumption.
[7] I was provided with a substantial amount of documentary evidence. Neither party relied on or called any witness evidence.
[8] HMRC submitted that important factual matters are...
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