© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
B1. Abuse of law
- Artificially creating the conditions for obtaining advantage contrary to the objectives of the legislation
"(3) Acts which are established to have as their purpose the obtaining of an advantage contrary to the objectives of the Community law applicable in the case by artificially creating the conditions required for obtaining that advantage shall result, as the case shall be, either in failure to obtain the advantage or in its withdrawal.
(4) The measures provided for in this Article shall not be regarded as penalties." (Council Regulation 2988/95, Article 4)
STATUTORY PRINCIPLE
- Member State power to lay down provisions to prevent abuse
"The exemptions provided for in Chapters 2 to 9 shall apply without prejudice to other Community provisions and in accordance with conditions which the Member States shall lay down for the purposes of ensuring the correct and straightforward application of those exemptions and of preventing any possible evasion, avoidance or abuse." (PVD Article 131)
- Parent/subsidiary directive
"[37] Under Article 11(1)(a) of Directive 90/434, by way of exception and in specific cases, Member States may refuse to apply or withdraw the benefit of all or any part of the provisions of that directive, inter alia, where the exchange of shares has tax evasion or tax avoidance as its principal objective or as one of its principal objectives. That same provision also provides that the fact that the operation is not carried out for valid commercial reasons, such as the restructuring or rationalisation of the activities of the companies participating in the operation, may constitute a presumption that the operation has such an objective (see, to that effect, Leur-Bloem, paragraphs 38 and 39).
[38] Thus, Article 11(1)(a) of Directive 90/434 reflects the general Community law principle that abuse of rights is prohibited. Individuals must not improperly or fraudulently take advantage of provisions of Community law. The application of Community legislation cannot be extended to cover abusive practices, that is to say, transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Community law (see, to that effect, Case C‑212/97 Centros [1999] ECR I-1459, paragraph 24; Case C‑255/02 Halifax and Others [2006] ECR I-1609, paragraphs 68 and 69; Case C‑456/04 Agip Petroli [2006] ECR I-3395, paragraphs 19 and 20; and Case C‑196/04 Cadbury Schweppes and Cadbury Schweppes Overseas [2006] ECR I-7995, paragraph 35)." (Kofoed C-321/05)
CASE LAW PRINCIPLE
Nature of the abuse principle
- Not a penalty
"[89] The impugned measures do not concern the imposition of tax fines or surcharges but the obligation to pay reassessed VAT liabilities. The supplementary tax assessments were issued on the grounds that Italmoda had not complied with the conditions for applying the exemption from, or deduction or refund of VAT for intra-Community supplies. The VAT-system for such intra-Community supplies is regulated by the Sixth Directive (see paragraphs 56-57 above). The Court agrees with the Government (see paragraph 65 above) that the supplementary tax assessments were the result of a tax regime that applied only to a target group – namely, taxable persons wishing to benefit from this VAT-system." (Italmoda Mariano Previti ECHR 16395/18 (2025))
"[56] Contrary to the assertions of Emsland-Stärke, the obligation to repay refunds received in the event that the two constituent elements of an abuse are established would not breach the principle of lawfulness. The obligation to repay is not a penalty for which a clear and unambiguous legal basis would be necessary, but simply the consequence of a finding that the conditions required to obtain the advantage derived from the Community rules were created artificially, thereby rendering the refunds granted undue payments and thus justifying the obligation to repay them." (Emsland-Stärke C-110/99)
"[40] The Court has repeatedly held that the refusal to allow a credit does not of itself amount to the imposition of a penalty by the tax authority. The CJEU held in Emsland-Stärke that there needs to be a clear and unambiguous basis for imposing a penalty in addition to disallowing the benefit fraudulently claimed..." (Butt v. HMRC [2019] EWCA Civ 554, Rose, Gross, Jackson LJJ)
- Not a rule established by directive, but a general principle
"[27] By contrast, the principle that abusive practices are prohibited, as applied in the sphere of VAT by the case-law stemming from the judgment in Halifax, is not a rule established by a directive, but is based on the settled case-law, cited in paragraphs 68 and 69 of that judgment, that, first, EU law cannot be relied on for abusive or fraudulent ends...
[28] Whilst the Court held, in paragraphs 70 and 71 of the judgment in Halifax, that the principle that abusive practices are prohibited also applies to the sphere of VAT, pointing out that preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive, it does not follow that the application of that principle in that sphere is subject to a requirement of transposition, as the provisions of the Sixth Directive are.
...
[31] The principle that abusive practices are prohibited, as applied to the sphere of VAT by the case-law stemming from the judgment in Halifax, thus displays the general, comprehensive character which is naturally inherent in general principles of EU law (see, by analogy, judgment of 15 October 2009, Audiolux and Others, C‑101/08, EU:C:2009:626, paragraph 50)." (Cussens C-251/16)
- Refusal of right of advantage on account of fraud/abuse is on account of objective conditions for right/advantage not being met
"[91]...In that connection the Court also notes that the CJEU held that a refusal of VAT rights is an expression of the principle that rules laid down by EU law cannot be relied on in pursuit of abusive or fraudulent ends and must be regarded as a consequence of the finding that the objective conditions required for obtaining those VAT rights have, in fact, not been satisfied (see paragraph 32 above)...
[92] On the basis of these considerations, the Court finds that the supplementary tax assessments, which were issued to collect tax in respect of which Italmoda turned out to be under an obligation to pay, did not pursue a punitive aim; they were issued on the mere grounds that Italmoda had not complied with the conditions for applying the exemption from, or deduction or refund of VAT for intra-Community supplies (see also Société Oxygène Plus, cited above, § 49)." (Italmoda Mariano Previti ECHR 16395/18 (2025))
"[37] Accordingly, in so far as abusive practices cannot form the basis of a right under EU law, the refusal of a benefit under, in this case, the VAT Directive does not amount to imposing an obligation on the individual concerned under that directive, but is merely the consequence of the finding that the objective conditions required for obtaining the advantage sought, under the directive as regards that right, have, in fact, not been satisfied and that, therefore, such a refusal does not require a specific legal basis (see, by analogy, judgments of 18 December 2014, Schoenimport Italmoda Mariano Previti and Others, C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 57, and of 22 November 2017, Cussens and Others, C‑251/16, EU:C:2017:881, paragraph 32 and the case-law cited).
[38] Consequently, such a case concerns rather the impossibility for the taxable person to claim a right under the VAT Directive, the objective criteria for the granting of which have not been satisfied because of an abusive practice affecting the transaction carried out by the taxable person itself (see, by analogy, judgment of 18 December 2014, Schoenimport Italmoda Mariano Previti and Others, C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 58). It follows that, in the case of an abusive practice intended to benefit from the VAT exemption scheme laid down in point 19 of Article 287 of the VAT Directive, it is for the national authorities and courts to refuse the benefit thereof, even in the absence of specific national provisions to that effect..." (UP Caffe C-171/23)
"[32] It should also be added that, according to the Court’s case-law, refusal of a right or an advantage on account of abusive or fraudulent acts is simply the consequence of the finding that, in the event of fraud or abuse of rights, the objective conditions required in order to obtain the advantage sought are not, in fact, met, and accordingly such a refusal does not require a specific legal basis (see, to that effect, judgment of 14 December 2000, Emsland-Stärke, C‑110/99, EU:C:2000:695, paragraph 56; judgment in Halifax, paragraph 93; and judgment of 4 June 2009, Pometon, C‑158/08, EU:C:2009:349, paragraph 28)." (Cussens C-251/16)
"[34] The Court bases its reasoning, inter alia, on the fact that refusal of fraudulent or abusive use of the benefits of the VAT Directive must be regarded as being inherent in the common system of VAT. ( 10 ) More particularly, the objective conditions required in order to obtain the advantage sought are not, in fact, met in such a case." (UP Caffe C-171/23, AG Kokott)
- Does not involve imposing an obligation on an individual
"[91] Accordingly, since, as has been noted in paragraph 70 above, abusive or fraudulent acts cannot found a right provided for by EU law, the refusal of an advantage under a directive, such as Directive 90/435, does not amount to imposing an obligation on the individual concerned under that directive, but is merely the consequence of the finding that the objective conditions required for obtaining the advantage sought, prescribed by the directive as regards that right, are met only formally (see, by analogy, judgment of 18 December 2014, Schoenimport Italmoda Mariano Previti and Others, C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 57 and the case-law cited)." (T Danmark C-116/16)
- National implementing legislation not required
"[33] Therefore, the principle that abusive practices are prohibited may be relied on against a taxable person to refuse him, inter alia, the right to exemption from VAT, even in the absence of provisions of national law providing for such refusal (see, to that effect, judgment of 18 December 2014, Schoenimport ‘Italmoda’ Mariano Previti and Others, C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 62)." (Cussens C-251/16)
- But, in the first place, see if result can be reached by conforming interpretation
"[32] Accordingly, it is for the referring court to ascertain whether there are, in Croatian law, rules of law, whether a provision or a general principle prohibiting abuse of rights, or other provisions relating to fraud or tax avoidance which might be interpreted in accordance with the requirements of EU law in regard to combatting tax fraud (see, to that effect, judgment of 18 December 2014, Schoenimport Italmoda Mariano Previti and Others, C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 53 and the case-law cited).
[33] In the present case, it is for the referring court, therefore, to determine whether, as the Commission suggests, it would not, in any event, be conceivable to base such a refusal on the interpretation in conformity with EU law of Article 9 of the General Tax Law or of Article 11 thereof." (UP Caffe C-171/23)
- Principle was inherent from the outset, not retrospective
"[41] The interpretation which the Court, in the exercise of the jurisdiction conferred upon it by Article 267 TFEU, gives to EU law clarifies and defines, where necessary, the meaning and scope of that law as it must be, or ought to have been, understood and applied from the date of its entry into force..." (Cussens C-251/16)
- But the liability resulting from denying the right/redefining the transaction must arise from applying national legislation
"[47] It follows from that case-law that application in the sphere of VAT of the principle that abusive practices are prohibited entails first determining the situation that would have prevailed in the absence of the transactions constituting such a practice and then assessing that redefined situation in the light of the relevant provisions of national law and of the Sixth Directive.
[48] Thus, the principle that abusive practices are prohibited obliges the national authorities, in essence, to apply the relevant VAT legislation to the transactions concerned, while disregarding those of the transactions that constitute an abusive practice.
[49] In the present instance, in the event that the referring court were to find that the leases preceding the sales of the properties at issue in the main proceedings constituted an abusive practice, any liability of those sales to VAT would have to be based on the relevant provisions of national legislation providing for such liability. The Sixth Directive cannot of itself impose obligations on an individual and cannot therefore be relied on as such against such a person before a national court (see, to that effect, judgment of 21 September 2017, DNB Banka, C‑326/15, EU:C:2017:719, paragraph 41 and the case-law cited)." (Cussens C-251/16)
Scope of the abuse principle
- Applies across EU law
"[74] Furthermore, the principle of prohibition of abuse of rights is applicable in fields as varied as
[i] the free movement of goods (judgment of 10 January 1985, Association des Centres distributeurs Leclerc and Thouars Distribution, 229/83, EU:C:1985:1, paragraph 27),
[ii] freedom to provide services (judgment of 3 February 1993, Veronica Omroep Organisatie, C‑148/91, EU:C:1993:45, paragraph 13),
[iii] public service contracts (judgment of 11 December 2014, Azienda sanitaria locale n. 5 Spezzino and Others, C‑113/13, EU:C:2014:2440, paragraph 62),
[iv] freedom of establishment (judgment of 9 March 1999, Centros, C‑212/97, EU:C:1999:126, paragraph 24),
[v] company law (judgment of 23 March 2000, Diamantis, C‑373/97, EU:C:2000:150, paragraph 33),
[vi] social security (judgments of 2 May 1996, Paletta, C‑206/94, EU:C:1996:182, paragraph 24; of 6 February 2018, Altun and Others, C‑359/16, EU:C:2018:63, paragraph 48; and of 11 July 2018, Commission v Belgium, C‑356/15, EU:C:2018:555, paragraph 99),
[vii] transport (judgment of 6 April 2006, Agip Petroli, C‑456/04, EU:C:2006:241, paragraphs 19 to 25),
[viii] social policy (judgment of 28 July 2016, Kratzer, C‑423/15, EU:C:2016:604, paragraphs 37 to 41),
[ix] restrictive measures (judgment of 21 December 2011, Afrasiabi and Others, C‑72/11, EU:C:2011:874, paragraph 62) and
[x] value added tax (VAT) (judgment of 21 February 2006, Halifax and Others, C‑255/02, EU:C:2006:121, paragraph 74)." (T Danmark C-116/16 - formatting added)
"[29] In addition, it should be pointed out, first, that the case-law cited in paragraph 27 above has been formulated in various areas of EU law, such as company law (judgments of 12 May 1998, Kefalas and Others, C‑367/96, EU:C:1998:222, and of 23 March 2000, Diamantis, C‑373/97, EU:C:2000:150), the common agricultural policy (judgments of 11 October 1977, Cremer, 125/76, EU:C:1977:148; of 3 March 1993, General Milk Products, C‑8/92, EU:C:1993:82; and of 14 December 2000, Emsland-Stärke, C‑110/99, EU:C:2000:695) and the sphere of VAT (judgment of 3 March 2005, Fini H, C‑32/03, EU:C:2005:128)." (Cussens C-251/16)
- Applies irrespective of where rights and advantages derive from
"[30] Secondly, it is apparent from the Court’s case-law that the principle that abusive practices are prohibited is applied to the rights and advantages provided for by EU law irrespective of whether those rights and advantages have their basis in the Treaties (see, so far as concerns the fundamental freedoms, inter alia judgments of 3 December 1974, van Binsbergen, 33/74, EU:C:1974:131, paragraph 13, and of 9 March 1999, Centros, C‑212/97, EU:C:1999:126, paragraph 24), in a regulation (judgments of 6 April 2006, Agip Petroli, C‑456/04, EU:C:2006:241, paragraphs 19 and 20, and of 13 March 2014, SICES and Others, C‑155/13, EU:C:2014:145, paragraphs 29 and 30) or in a directive (see, in relation to VAT, inter alia judgment of 3 March 2005, Fini H, C‑32/03, EU:C:2005:128, paragraph 32; judgment in Halifax, paragraphs 68 and 69; and judgment of 13 March 2014, FIRIN, C‑107/13, EU:C:2014:151, paragraph 40). It is thus apparent that that principle is not of the same nature as the rights and advantages to which it applies." (Cussens C-251/16)
- Irrespective of the right affected by the abuse or fraud
"[25] The Court has already held that, in so far as any refusal of a right under the VAT Directive reflects the general principle that no one may benefit from the rights stemming from the Union’s legal system for abusive or fraudulent ends, such a refusal is the responsibility, in general, of the national authorities and courts, irrespective of the VAT right affected by the abuse or the fraud (see, to that effect, judgment of 18 December 2014, Schoenimport Italmoda Mariano Previti and Others, C‑131/13, C‑163/13 and C‑164/13, EU:C:2014:2455, paragraph 46)." (UP Caffe C-171/23)
- Applies to rules deriving solely from domestic law
"[27] In my view they were right to reject it. VAT is a largely but not entirely harmonised tax which depends for its application to taxpayers on its implementation in the domestic law of member states but is part of the legal order of the European Union. The domestic VAT regime of member states will include provisions directly transposing the relevant Directives into national law. Depending on the drafting tradition of the relevant member state, the general principles of its tax law and its rules of private (especially contract) law, this may involve adapting or supplementing the language of the Directive to accommodate its requirements to the domestic context. In addition, there may be national provisions dealing with matters which the Directives leave to member states, either expressly or because they relate to matters such as procedure and civil remedies which are left to member states under the general distribution of functions between EU and national institutions. These features of national implementing laws are nonetheless part of a scheme for implementing an EU tax. National VAT regimes fall to be applied not just according to the letter of the national law, but in accordance with a number of general principles of EU law whose origin is the jurisprudence of the Union rather than the constitutive treaties or legislation made under them. These include the principle of respect for fundamental rights, the principle of proportionality, the principle of legal certainty with its concomitant doctrines of legitimate expectation and good faith, and the principle of abuse of law. Their application is not excluded because some particular feature of the national legal regime applying an EU tax has its origin in a domestic legislative choice rather than in a member state's obligation to implement a Directive." (HMRC v. Pendragon Plc [2015] UKSC 37)
Burden of proof
- For the Member State to establish the existence of the abuse
"[117] On the other hand, where a tax authority of the source Member State seeks, on a ground relating to the existence of an abusive practice, to refuse to grant the exemption provided for in Article 5 of Directive 90/435 to a company that has paid dividends to a company established in another Member State, it has the task of establishing the existence of elements constituting such an abusive practice while taking account of all the relevant factors, in particular the fact that the company to which the dividends have been paid is not their beneficial owner." (T Danmark C-116/16)
- Artificiality of insertion of conduit company capable of being proven by variety of factors
"[101] Thus, it is an indication of the existence of an arrangement intended to obtain improper entitlement to the exemption provided for in Article 5 of Directive 90/435 that all or almost all of the aforesaid dividends are, very soon after their receipt, passed on by the company that has received them to entities which do not fulfil the conditions for the application of Directive 90/435, either because they are not established in any Member State, or because they are not incorporated in one of the forms covered by the directive, or because they are not subject to one of the taxes listed in Article 2(c) of the directive, or because they do not have the status of ‘parent company’ and do not meet the conditions laid down in Article 3 of the directive.
[102] The conditions for the application of Directive 90/435 are not met by entities resident for tax purposes outside the European Union, such as, it seems, the companies at issue in Case C‑117/16 or the investment funds at issue in Case C‑116/16. In those cases, if the dividends had been paid directly by the Danish debtor company to the entities which, according to the Ministry of Taxation, were their beneficial owners, the Kingdom of Denmark could have levied withholding tax.
[103] Likewise, the artificiality of an arrangement is capable of being borne out by the fact that the relevant group of companies is structured in such a way that the company which receives the dividends paid by the debtor company must itself pass those dividends on to a third company which does not fulfil the conditions for the application of Directive 90/435, with the consequence that it makes only an insignificant taxable profit when it acts as a conduit company in order to enable the flow of funds from the debtor company to the entity which is the beneficial owner of the sums paid.
[104] The fact that a company acts as a conduit company may be established where its sole activity is the receipt of dividends and their transmission to the beneficial owner or to other conduit companies. The absence of actual economic activity must, in the light of the specific features of the economic activity in question, be inferred from an analysis of all the relevant factors relating, in particular, to the management of the company, to its balance sheet, to the structure of its costs and to expenditure actually incurred, to the staff that it employs and to the premises and equipment that it has.
[105] Indications of an artificial arrangement may also be constituted by the various contracts existing between the companies involved in the financial transactions at issue, giving rise to intragroup flows of funds, by the way in which the transactions are financed, by the valuation of the intermediary companies’ equity and by the conduit companies’ inability to have economic use of the dividends received. In this connection, such indications are capable of being constituted not only by a contractual or legal obligation of the parent company receiving the dividends to pass them on to a third party but also by the fact that, ‘in substance’, as the referring court states, that company, without being bound by such a contractual or legal obligation, does not have the right to use and enjoy those dividends.
[106] Moreover, such indications may be reinforced by the simultaneity or closeness in time of, on the one hand, the entry into force of major new tax legislation, such as the Danish legislation at issue in the main actions or the United States legislation referred to in paragraph 51 above, and, on the other hand, the setting up of complex financial transactions and the grant of intragroup loans." (T Danmark C-116/16)
THE PRINCIPLE
Purely artificial arrangements, devoid of economic substance, solely for purpose of tax advantage contrary to purpose
"[49] It should be recalled that the right to deduct VAT applies regardless of the purpose and outcome of the economic activity in question, and whether or not VAT due on previous transactions involving the goods concerned has been paid to the Treasury has no bearing on that right. Furthermore, taxable persons are generally free to choose the organizational structures or transactional arrangements they deem most appropriate for their economic activities and for limiting their tax burden. The principle prohibiting abusive practices, which applies to VAT, only prohibits purely artificial arrangements, devoid of economic substance, carried out solely for the purpose of obtaining a tax advantage, the granting of which would be contrary to the objectives of the VAT Directive (Order of 3 September 2020, Vikingo Fővállalkozó, C-610/19, EU:C:2020:673, paragraph 62 and the case law cited).
...
[50] It follows that EU law precludes a national practice of classifying as "an exercise not in accordance with the purpose of that right" the choice of a taxable person to carry out an economic activity in a manner which enables him to benefit from a credit scheme and of refusing, on that ground, to that taxable person the benefit of the right to deduct input VAT paid, where there is no evidence of a purely artificial arrangement, devoid of economic reality, carried out for the sole purpose, or at least with the essential purpose, of obtaining a tax advantage the granting of which would be contrary to the objectives of the VAT Directive (see, to that effect, Order of 9 January 2023, ATS 2003, C-289/22, EU:C:2023:26, paragraph 42)." (Granulines Invest C-270/24)
"[54] As regards any abusive practice, it should be noted that such a practice can exist only if two conditions are satisfied, namely, first, that the transactions concerned, while fulfilling the conditions laid down by the relevant provisions of that directive and the 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 and, secondly, that it is apparent from a number of objective factors that the essential aim of the transactions concerned is solely to obtain that tax advantage (see, in particular, judgments of 17 December 2015, WebMindLicenses, C‑419/14, EU:C:2015:832, paragraph 36; of 10 July 2019, Kuršu zeme, C‑273/18, EU:C:2019:588, paragraph 35; and of 18 June 2020, KrakVet Marek Batko, C‑276/18, EU:C:2020:485, paragraph 85)." (Ferimet C-281/20)
"[98] Examination of a set of facts is therefore needed to establish whether the constituent elements of an abusive practice are present, and in particular whether economic operators have carried out purely formal or artificial transactions devoid of any economic and commercial justification, with the essential aim of benefiting from an improper advantage (see, to that effect, judgments of 20 June 2013, Newey, C‑653/11, EU:C:2013:409, paragraphs 47 to 49; of 13 March 2014, SICES and Others, C‑155/13, EU:C:2014:145, paragraph 33; and of 14 April 2016, Cervati and Malvi, C‑131/14, EU:C:2016:255, paragraph 47)."(T Danmark C-116/16)
- Solely for the purpose of wrongfully obtaining advantage under EU law
"[35] Second, so far as concerns the existence of any abuse of rights on the part of the purchaser of the immovable property at issue, it should be pointed out that EU law on VAT precludes any right of a taxable person to deduct input VAT where the transactions from which that right derives constitute an abusive practice (judgment of 21 February 2006, Halifax and Others, C‑255/02, EU:C:2006:121, paragraph 85). That right cannot extend to abusive practices by economic operators, that is to say, transactions carried out not in the context of normal commercial operations but solely for the purpose of wrongfully obtaining advantages provided for under EU law (see, to that effect, judgment of 22 December 2010, Weald Leasing, C‑103/09, EU:C:2010:804, paragraph 26)." (UAB Ha.En C-227/21)
(1) ADVANTAGE CONTRARY TO THE PURPOSE OF THE LEGISLATION
- Advantage depended on two exemptions, one of which held not apply: other exemption may still represent advantage
"[33] When Atrium itself operated the Club and made supplies of sporting services, it accounted for VAT on the consideration for those supplies. The WJB Scheme, which replaced the AIC scheme, was designed to secure for Atrium the net proceeds of the supplies by the Club free from liability to VAT. That was to be done through establishing a new company to operate the Club that would make the supplies as a non-profit making organisation without attracting VAT, and pay over all the benefit derived from those supplies to Atrium by way of a licence fee under a Turnover Licence which similarly did not attract VAT. This combination of inter-related elements was essential to the scheme. And the latter element was necessary not in order to remove AAB's capacity to make a profit, since AAB could have used all the net proceeds for the development of the Club facilities without losing its non-profit making status, but so as to pass the profit over to Atrium without VAT being incurred. Accordingly, I do not accept Atrium's submission, as set out in its skeleton argument, that use of the land exemption was no part of the arrangements seeking to achieve a tax advantage.
[34] There is no doubt that Atrium indeed received payment on the basis which I have just described. Accordingly, I consider that the scheme resulted in Atrium achieving a real benefit. And, in my judgment, that benefit is properly to be regarded as a tax advantage since Atrium was not liable to pay VAT on the fee under the Turnover Licence whereas AAB, although - contrary to the parties' understanding – not within the sporting exemption and thus liable to account for VAT on the Club's supplies, had by payment of that fee removed its ability to discharge such a liability. It seems to me that an arrangement which results in that situation is contrary to the purpose of the exempting provisions in the Sixth Directive." (HMRC v. Atrium Club Limited [2010] EWHC 970 (Ch), Roth J)
Meaning of advantage
- Or, more generally, acting on the basis of a believed tax advantage can be sufficient, even if not correct
"[71] We agree with that analysis and we consider that it applies in the present case. The tax advantage here is the fact that VAT was not charged and accounted for on the supplies of sports services by the Companies. The advantage was contrary to the purpose of the Directive because only supplies by non-profit making bodies are exempt and Companies were not non-profit making. The benefit of the tax advantage accrued to the Partnership and the LLP in the form of rent, which was exempt for VAT purposes, in that the amount that the Companies could afford to pay as rent was greater than it would have been if they had accounted for VAT.
...
[74] Having heard full argument on the point, we agree with the conclusion in Atrium that the fact that the scheme does not work as the parties intended does not mean that no tax advantage accrued. Further it is not right to say that HMRC should have sought to recover the VAT from the Companies. Who is liable to pay the VAT once a scheme is found to be an abuse of law depends on the proper redefinition of the transactions following the finding of abuse..." (Massey v. HMRC [2015] UKUT 405 (TCC), Rose J and Judge Sinfield)
Contrary to purpose of legislation
- Pursuit of most favourable tax regime does not set up general presumption of fraud or abuse
"[81] Whilst the pursuit by a taxpayer of the tax regime most favourable for him cannot, as such, set up a general presumption of fraud or abuse (see, to that effect, judgments of 12 September 2006, Cadbury Schweppes and Cadbury Schweppes Overseas, C‑196/04, EU:C:2006:544, paragraph 50; of 29 November 2011, National Grid Indus, C‑371/10, EU:C:2011:785, paragraph 84; and of 24 November 2016, SECIL, C‑464/14, EU:C:2016:896, paragraph 60), the fact remains that such a taxpayer cannot enjoy a right or advantage arising from EU law where the transaction at issue is purely artificial economically and is designed to circumvent the application of the legislation of the Member State concerned (see, to that effect, judgments of 12 September 2006, Cadbury Schweppes and Cadbury Schweppes Overseas, C‑196/04, EU:C:2006:544, paragraph 51; of 7 November 2013, K, C‑322/11, EU:C:2013:716, paragraph 61; and of 25 October 2017, Polbud — Wykonawstwo, C‑106/16, EU:C:2017:804, paragraphs 61 to 63)." (T Danmark C-116/16)
"[37] As to freedom of establishment, the Court has already held that the fact that the company was established in a Member State for the purpose of benefiting from more favourable legislation does not in itself suffice to constitute abuse of that freedom (see, to that effect, Centros, paragraph 27, and Case C-167/01 Inspire Art [2003] ECR I-10155, paragraph 96)." (Cadbury Schweppes C‑196/04)
- Not abusive to take advantage of opportunity that is inherent in VAT system
"[11] The first arises from the assumption made by the Court of Justice in Halifax that the principle will not apply to what it called "normal commercial operations" (para 69). Subsequent case-law has established that this means those that are normal in the context of the relevant line of business, not necessarily normal for the particular taxpayer: Revenue and Customs Commissioners v Weald Leasing Ltd (Case C-103/09) [2011] STC 596. I do not think that the court can have intended to set up a third distinct test, in addition to the two which are set out in paras 74-75 and repeated in its order. The "normality" of a transaction is relevant to the question posed in the court's first test, about the "purpose" of the relevant provision of the VAT Directives. "Normal commercial operations" will not as a general rule be regarded as contrary to the purpose of the Directives, since these must be assumed to have been designed to accommodate them. Thus in Weald Leasing the taxpayer's decision to take equipment on lease from an intermediate company rather than buy it outright was an ordinary commercial transaction. It was not abusive even though it was unusual for the taxpayer in question and was designed to obtain a tax advantage by spreading the liability to tax over a longer period. The choice between leasing and outright purchase was a choice accommodated by the scheme of the VAT legislation. The tax treatment of lease payments being a facility available under the legislation itself, resort to it could not be regarded as contrary to its purpose. For the same reason, a transaction is not abusive merely because it falls within an exception or derogation from ordinary principles of EU law governing the incidence of VAT, such as the right enshrined in the Sixth Directive to deduct input tax generated by transactions in another member state. It follows that the sourcing of goods or services from a country in which the VAT regime is more favourable is not in itself abusive, even though the object and effect is to allow the deduction of input tax without the payment of output tax (Revenue and Customs Commissioners v RBS Deutschland Holding GmbH (Case C-277/09) [2011] STC 345). The reason, as the court explained in that case at paras 51-52, is that this is a choice inherent in a scheme of taxation that is designed to be fiscally neutral as between different member states while allowing for some differences between their implementing laws. Likewise, the conduct of a genuine business activity through a subsidiary incorporated in another member state is not abusive, although the sole reason for the choice is that it has a lower rate of corporation tax: Cadbury-Schweppes Plc v Inland Revenue Commissioners (Case C-196/04) [2006] STC 1908. Precisely the same considerations must apply to a decision to source goods or services from outside the European Union, an option which is inherent in the territorial limits of the EU VAT regime and the assignment of economic relations with third countries to other policies of the Union." (HMRC v. Pendragon Plc [2015] UKSC 37)
- Obtaining input deduction for VAT paid to supplier who is insolvent and may not pay output tax not contrary to objectives
"[36] As to the first condition, even assuming that the deduction that is sought by the purchaser of immovable property of the input VAT paid by him or her when taking over that property may be classified as a tax advantage, that advantage cannot be regarded as contrary to the objectives of the VAT Directive. As the Advocate General has stated in points 40 to 44 of her Opinion, that is what is revealed by Article 199(1)(g) of the VAT Directive, which permits the Member States, in the case of the supply of immovable property sold by a judgment debtor in a compulsory sale procedure, to have recourse to the reverse charge mechanism and to transfer the VAT burden to the taxable person to whom the taxable supply is made. Whilst the Republic of Lithuania chose not to have recourse to that mechanism, the very existence of the option provided for by that provision shows that the EU legislature did not regard deduction of the VAT paid by the purchaser of immovable property in a compulsory sale procedure as contrary to the objectives of the VAT Directive." (UAB Ha.En C-227/21)
- Spreading VAT payment over time by leasing on commercial terms rather than buying not contrary to purpose of legislation
"[34] A taxable person cannot be criticised for choosing a leasing transaction which procures him an advantage consisting, as is apparent from the decision making the reference, in spreading the payment of his tax liability, rather than a purchase transaction which does not procure him any such advantage, provided that the VAT on that leasing transaction is duly and fully paid." (Weald Leasing C-103/09)
(2) PRINCIPAL AIM OF THE TRANSACTION TO OBTAIN THE ADVANTAGE
- Intention of artificially creating the conditions for obtaining the advantage
"[114] In the light of all those matters, the answer to Question 4(d) and (e) in the main actions is that proof of an abusive practice requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the EU rules, the purpose of those rules has not been achieved and, second, a subjective element consisting in the intention to obtain an advantage from the EU rules by artificially creating the conditions laid down for obtaining it. The presence of a certain number of indications may demonstrate that there is an abuse of rights, in so far as those indications are objective and consistent. Such indications can include, in particular, the existence of conduit companies which are without economic justification and the purely formal nature of the structure of the group of companies, the financial arrangements and the loans." (T Danmark C-116/16)
- Principal aim sufficient, need not be sole aim
"[79] To permit the setting up of financial arrangements whose sole aim is to benefit from the tax advantages resulting from the application of Directive 90/435 would not be consistent with such objectives and, on the contrary, would undermine the effective functioning of the internal market by distorting the conditions of competition. As the Advocate General has, in essence, observed in point 51 of her Opinion in Case C‑116/16, that would also be the case even if the transactions at issue do not exclusively pursue such an aim, as the Court has held that the principle that abusive practices are prohibited applies, in tax matters, where the accrual of a tax advantage constitutes the essential aim of the transactions at issue (see, to that effect, judgments of 21 February 2008, Part Service, C‑425/06, EU:C:2008:108, paragraph 45, and of 22 November 2017, Cussens and Others, C‑251/16, EU:C:2017:881, paragraph 53)." (T Danmark C-116/16)
"[44] Therefore, when it stated, in paragraph 82 of that judgment, that in any event, the transactions at issue had the sole purpose of obtaining a tax advantage, it was not establishing that circumstance as a condition for the existence of an abusive practice, but simply pointing out that, in the matter before the referring court in that case, the minimum threshold for classifying a practice as abusive had been passed.
[45] The reply to the first question therefore is that the Sixth Directive must be interpreted as meaning that there can be a finding of an abusive practice when the accrual of a tax advantage constitutes the principal aim of the transaction or transactions at issue." (Part Service C-425/06)
- Purpose may be purpose scheme as a whole or component part
"[13] These considerations effectively answer a question which is likely to arise in most cases involving prearranged sequences of transactions. Is the relevant "aim" that of the scheme as a whole or of its component parts? The answer is that it may be either or both. Because the principle of abuse of law is, in this context, directed mainly to the method by which a commercial purpose is achieved, it is necessary to analyse each transaction by which it is achieved. Because the purpose of each step will generally be to contribute to the working of the whole scheme, the effect of the whole scheme has also to be considered. In WHA Ltd v Customs and Excise Commissioners [2007] STC 1695, para 22, Lord Neuberger, delivering the leading judgment in the Court of Appeal, rejected the submission that the court was confined to considering the artificiality or purpose of each individual step, since these will commonly be individually unassailable but designed to produce the tax advantage in combination. I agree with this observation." (HMRC v. Pendragon Plc [2015] UKSC 37)
"[76] We do not find any error of law here. It is clear from Lord Sumption’s comments at paragraph 13 of his judgment in Pendragon, and we respectfully agree, that it may be necessary both to analyse each transaction in a scheme individually and also to consider the effect of the scheme as a whole when identifying the essential aim of the transactions. In our view, this was the approach adopted by Judge Mosedale. She concluded, at [250], that it was objectively apparent that the sole and essential aim of the arrangements was to obtain an abusive tax advantage. She did so because she found, for reasons set out in [247] and [248], that the arrangements were artificial and inconsistent with normal commercial practice." (Massey v. HMRC [2015] UKUT 405 (TCC), Rose J and Judge Sinfield)
- Subjective element
"[97] As is clear from the Court’s case-law, proof of an abusive practice requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the EU rules, the purpose of those rules has not been achieved and, second, a subjective element consisting in the intention to obtain an advantage from the EU rules by artificially creating the conditions laid down for obtaining it (judgments of 14 December 2000, Emsland-Stärke, C‑110/99, EU:C:2000:695, paragraphs 52 and 53, and of 12 March 2014, O. and B., C‑456/12, EU:C:2014:135, paragraph 58)." (T Danmark C-116/16)
- Must be established by objective factors
"[35]...Second, it must be apparent from a number of objective factors that the essential aim of the transactions concerned is solely to obtain that tax advantage (see, to that effect, judgments of 21 February 2006, Halifax and Others, C‑255/02, EU:C:2006:121, paragraphs 74 and 75, and of 11 November 2021, Ferimet, C‑281/20, EU:C:2021:910, paragraph 54 and the case-law cited)..." (UAB Ha.En C-227/21)
"[31] ... But the Halifax test requires the "essential aim" of a transaction is to be determined by reference to "objective factors". As Advocate General Maduro put it at para 87 of his opinion, this "must not be confused with the subjective intention of the participants in those activities". Much of the evidence which the parties deployed before the First Tier Tribunal could go only to Pendragon's subjective intention or motive, or KPMG's assumptions about the attractions of their scheme to their client. Much of the rest was of no assistance in a case where tax planning was admitted to be part of the rationale of the scheme and transactions comprising it spoke for themselves." (HMRC v. Pendragon Plc [2015] UKSC 37)
- Irrelevant whether person ordinarily enters into this type of transaction
"[43] Moreover, the fact that an undertaking which resorts to leasing transactions such as those at issue in the main proceedings does not engage in leasing transactions in the context of its normal commercial operations does not affect the foregoing considerations.
[44] A finding that there was an abusive practice is inferred, not from the nature of the commercial operations usually engaged in by the party which made the transactions in question, but from the object and effects of those transactions, as well as their purpose." (Weald Leasing C-103/09)
- But it is relevant whether the transaction is normal in this line of business
"[11] The first arises from the assumption made by the Court of Justice in Halifax that the principle will not apply to what it called "normal commercial operations" (para 69). Subsequent case-law has established that this means those that are normal in the context of the relevant line of business, not necessarily normal for the particular taxpayer: Revenue and Customs Commissioners v Weald Leasing Ltd (Case C-103/09) [2011] STC 596. I do not think that the court can have intended to set up a third distinct test, in addition to the two which are set out in paras 74-75 and repeated in its order. The "normality" of a transaction is relevant to the question posed in the court's first test, about the "purpose" of the relevant provision of the VAT Directives. "Normal commercial operations" will not as a general rule be regarded as contrary to the purpose of the Directives, since these must be assumed to have been designed to accommodate them. Thus in Weald Leasing the taxpayer's decision to take equipment on lease from an intermediate company rather than buy it outright was an ordinary commercial transaction. It was not abusive even though it was unusual for the taxpayer in question and was designed to obtain a tax advantage by spreading the liability to tax over a longer period. The choice between leasing and outright purchase was a choice accommodated by the scheme of the VAT legislation. The tax treatment of lease payments being a facility available under the legislation itself, resort to it could not be regarded as contrary to its purpose." (HMRC v. Pendragon Plc [2015] UKSC 37)
- Lease with turnover rent designed to extract profit of non-profit evidence of essential tax aim
"[39] Atrium submits that the underlying aim was that the Bradneys wished to move back away from the business while retaining as an investment the property on which the Club had its premises. In that regard, Atrium contends that the Turnover Licence is to be regarded as an ordinary relationship between landlord and third party tenant, with "property costs" naturally a primary expense to any business running a health and fitness club. However, although I accept that the Bradneys may have been keen to give up actually running the business, in other respects these contentions are inconsistent with the factual findings by the Tribunal as to the nature of the Turnover Licence and its terms, and the way the fee was calculated so as to represent all profits from running the Club. The focus under this question is on the arrangements comprising the scheme. The essential aim of those arrangements was to implement a mechanism whereby the net proceeds of the business continued to accrue to the Bradneys' company, Atrium, with the benefit of exemption from VAT." (HMRC v. Atrium Club Limited [2010] EWHC 970 (Ch), Roth J)
- Fact that alternative structure would have given rise to same result may indicate no tax advantage aim
"[110] That said, it remains possible, in a situation where the dividends would have been exempt had they been paid directly to the company having its seat in a third State, that the aim of the group’s structure is unconnected with any abuse of rights. In such a case, the group cannot be reproached for having chosen such a structure rather than direct payment of the dividends to that company." (T Danmark C-116/16)
Mixed purposes
- Does tax advantage constitute principal aim of method used to achieve commercial objective?
"[12] The second difficulty which arises from the application of the principle of abuse of law to tax avoidance is that of concurrent purposes. Tax avoidance schemes are rarely directed exclusively to tax avoidance. It is difficult to conceive of a scheme, other than a fraudulent one, which achieved absolutely nothing but a tax advantage. They are usually directed to achieving a commercial purpose, such as the provision of the call centres in Halifax, in a way which avoids a tax liability that would otherwise be associated with it. The potential for abuse consists in the method chosen to achieve the commercial purpose. In Ministero dell'Economia e delle Finanze v Part Service Srl (Case C-425/06) [2008] STC 3132, the consideration payable by the lessee under a leasing transaction was artificially split between two contracts, one with the lessor and the other with an associated company of the lessor. The latter contract was structured so as to qualify as an exempt financial contract under Italian law, so as to reduce the amount chargeable to VAT. The transactions had a legitimate commercial purpose, namely the leasing of the cars, but the method of achieving that purpose was held to be open to challenge if "the accrual of a tax advantage constitutes the principal aim of the transaction or transactions at issue" (para 45). This conclusion seems to me to do no more than make explicit something which is implicit in the Halifax tests. Identifying the "essential aim" in a case of concurrent fiscal and commercial purposes depends on an objective analysis of the method used to achieve the commercial purpose. As Advocate General Maduro observed in a passage from (para 89) of his opinion which was in terms approved by the court (para 75), the taxpayer's choices must be "at least to some extent, accounted for by ordinary business aims". The question is therefore whether the commercial objective is enough to explain the particular features of the contractual arrangements which produce the tax advantage." (HMRC v. Pendragon Plc [2015] UKSC 37)
- Special features of scheme lacking any commercial rationale giving principal tax aim
"[33]...However, neither of these two special features of the scheme had any commercial rationale other than the achievement of a tax advantage. They were manifestly included not for the purpose of facilitating the obtaining of credit from SGJ but for the sole purpose of legally recharacterising a transfer of cars without incurring net liability on the price." (HMRC v. Pendragon Plc [2015] UKSC 37)
TYPES OF POTENTIAL ABUSE
Identity of recipient of supply
- Contractual terms may not reflect the true identity of the recipient of the supply
"[47] In the main proceedings, it is not disputed that, formally, in accordance with the contractual terms, Alabaster provided the lenders with the supplies of loan broking services and that it was the recipient of the supplies of advertising services provided by Wallace Barnaby.
[48] However, taking into account the economic reality of the business relationships between, on the one hand, Mr Newey, Alabaster and the lenders and, on the other hand, Mr Newey, Alabaster and Wallace Barnaby, as apparent from the order for reference and, in particular, the matters of fact mentioned by the Upper Tribunal (Tax and Chancery Chamber) in the third question, it is conceivable that the effective use and enjoyment of the services at issue in the main proceedings took place in the United Kingdom and that Mr Newey profited therefrom." (Newey C-653/11)
- If abusive, redefine the contractual terms
"[49] It is for the referring court, by means of an analysis of all the circumstances of the dispute in the main proceedings, to ascertain whether the contractual terms do not genuinely reflect economic reality and whether it is Mr Newey, and not Alabaster, who was actually the supplier of the loan broking services at issue and the recipient of the supplies of advertising services provided by Wallace Barnaby.
[50] If that were the case, those contractual terms would have to be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice (see, to that effect, Halifax and Others , paragraph 98).
[51] In the present case, the re-establishment of the situation that would have prevailed in the absence of the transactions at issue, if the referring court were to consider them to constitute an abusive practice, would, in particular, mean that the services agreement and the advertising arrangements concluded between Alabaster and Wallace Barnaby could not be relied upon against the Commissioners, who could legitimately regard Mr Newey as actually being the supplier of the loan broking services and the recipient of the supplies of advertising services at issue in the main proceedings." (Newey C-653/11)
Identity of supplier
- Issuing invoice identifying fictitious supplier not abusive because it does not result in material conditions being met
"[55] Consequently, such a practice does not cover the mention of a fictitious supplier on an invoice relating to the goods or services on the basis of which the right to deduct VAT is exercised, since, as has been noted in paragraph 27 of the present judgment, the naming of the supplier, on the invoice relating to the goods or services on the basis of which the right to deduct VAT is exercised, is a formal condition of that right and does not therefore result in the material conditions laid down by the provisions relating to the right of deduction being met." (Ferimet C-281/20)
Exemption and reliefs
- Artificial transactions to access exemption
"[74] However, according to the information set out in the order for reference, two leases were entered into in respect of the new properties at issue in the main proceedings. They were entered into on the same day between the appellants in the main proceedings and a company associated with them, and provided for the lease and immediate lease back of the properties. Furthermore, the leases were terminated, by common accord, less than a month after they were entered into, shortly before the appellants in the main proceedings sold the properties to third party purchasers. It thus appears, as the Advocate General has observed in point 94 of his Opinion, that the properties at issue in the main proceedings had, before their sale to third party purchasers, not yet been actually used by their owner or their tenant, a matter which is for the referring court to verify.
...
[79] Thus, only the first supply of a building or part of a building is, in principle, subject to VAT; however, in order to determine which supply is the first one, account should not be taken of supplies of a purely artificial nature whose essential aim is to obtain a tax advantage." (Cussens C-251/16)
- Abuse of exemption for small traders by incorporating new company to continue previous business
"[28] Consequently, if a company is formed in order to maintain the benefit of the VAT exemption scheme, laid down in point 19 of Article 287 of the VAT Directive, in respect of an activity which appears to have been carried out previously by another company, at a time when that latter company has ceased to satisfy the conditions necessary to benefit from that scheme, which it is for the referring court to ascertain, the grant of such a tax advantage would not meet the objectives pursued by that scheme." (UP Caffe C-171/23)
- Establishing non-profit company to make exempt supplies to public + paying that company's turnover to original company by exempt lease of land
"[34] ... Accordingly, I consider that the scheme resulted in Atrium achieving a real benefit. And, in my judgment, that benefit is properly to be regarded as a tax advantage since Atrium was not liable to pay VAT on the fee under the Turnover Licence whereas AAB, although - contrary to the parties' understanding – not within the sporting exemption and thus liable to account for VAT on the Club's supplies, had by payment of that fee removed its ability to discharge such a liability. It seems to me that an arrangement which results in that situation is contrary to the purpose of the exempting provisions in the Sixth Directive." (HMRC v. Atrium Club Limited [2010] EWHC 970 (Ch), Roth J)
- Splitting single supply between two connected parties to avoid single supply treatment may be abusive
"[59]As regards the first criterion, that court can take into account that the anticipated result is the accrual of a tax advantage linked to the exemption, pursuant to Article 13B(a) and (d) of the Sixth Directive, of the services entrusted to the co-contracting company of the leasing company.
[60] That result would appear to be contrary to the objective of Article 11A(1) of the Sixth Directive, namely the taxation of everything which constitutes consideration received or to be received from the customer.
...
[62] As regards the second criterion, the national court, in the assessment which it must carry out, may take account of the purely artificial nature of the transactions and the links of a legal, economic and/or personal nature between the operators involved (Halifax and Others, paragraph 81), those aspects being such as to demonstrate that the accrual of a tax advantage constitutes the principal aim pursued, notwithstanding the possible existence, in addition, of economic objectives arising from, for example, marketing, organisation or guarantee considerations." (Part Service C-425/06)
- Use of margin scheme where goods have never fully suffered VAT
"[30] The effect of the KPMG scheme was to enable the Pendragon Group to sell demonstrator cars second-hand under the margin scheme in circumstances where VAT had not only been previously charged but fully recovered. The result was that no net charge to VAT was ever suffered, except on the small or non-existent profits realised on the resale. A system designed to prevent double taxation on the consideration for goods has been exploited so as to prevent any taxation on the consideration at all. I conclude that in that respect the KPMG scheme was contrary to the EU policy underlying the margin scheme, and that the first Halifax test was satisfied." (HMRC v. Pendragon Plc [2015] UKSC 37)
Input tax
- Obtaining full input tax deduction despite making mostly exempt supplies
"To allow taxable persons to deduct all input VAT even though, in the context of their normal commercial operations, no transactions conforming with the deduction rules of the Sixth Directive or of the national legislation transposing it would have enabled them to deduct such VAT, or would have allowed them to deduct only a part, would be contrary to the principle of fiscal neutrality and, therefore, contrary to the purpose of those rules." (Halifax Plc C-255/02)
- Deferring irrecoverable input VAT by leasing from connected party on uncommercial terms
"[45] In those circumstances, the answer to the first and second questions is that the tax advantage accruing from an undertaking’s recourse to asset leasing transactions, such as those at issue in the main proceedings, instead of the outright purchase of those assets, does not constitute a tax advantage the grant of which would be contrary to the purpose of the relevant provisions of the Sixth Directive and of the national legislation transposing it, provided that the contractual terms of those transactions, particularly those concerned with setting the level of rentals, correspond to arm’s length terms and that the involvement of an intermediate third party company in those transactions is not such as to preclude the application of those provisions, a matter which it is for the national court to determine. The fact that the undertaking does not engage in leasing transactions in the context of its normal commercial operations is irrelevant in that regard." (Weald Leasing C-103/09)
REDEFINITION OF THE TRANSACTION
Nature of redefinition
- Obligation not a discretion (unless all tax paid and not overpaid)
"[41] If the Halifax principle accordingly applies, it is necessary to redefine the arrangements so as "to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice." That is an obligation, not a matter of discretion, as the ECJ makes clear in paragraph 94 of its ruling: para 27 above. It is only if the tax has been fully paid (and not overpaid) and where no rights of third parties need protection, that such redefinition may be academic and therefore unnecessary: WHA at [57]." (HMRC v. Atrium Club Limited [2010] EWHC 970 (Ch), Roth J)
- Notional for the purposes of tax authority assessing VAT as if abusive features not present
"[41] It follows that the transactions fall to be redefined "so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice": Halifax, para 98. The redefinition is purely notional. Its effect is not to alter retrospectively the terms of the transactions, but simply to entitle the Commissioners, as between themselves and the taxpayer, to treat them for the purpose of assessing VAT as if their abusive features had not been present: see Revenue and Customs Commissioners v Newey (Case C-653/11) [2013] STC 2432, paras 50-51. The object of any redefinition in this case must be to deprive the taxpayer of the illegitimate advantage of paying VAT only on their profit margin on the resale of the cars to the consumer." (HMRC v. Pendragon Plc [2015] UKSC 37)
"[50] If that were the case, those contractual terms would have to be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice (see, to that effect, Halifax and Others, paragraph 98).
[51] In the present case, the re-establishment of the situation that would have prevailed in the absence of the transactions at issue, if the referring court were to consider them to constitute an abusive practice, would, in particular, mean that the services agreement and the advertising arrangements concluded between Alabaster and Wallace Barnaby could not be relied upon against the Commissioners, who could legitimately regard Mr Newey as actually being the supplier of the loan broking services and the recipient of the supplies of advertising services at issue in the main proceedings." (Newey C-653/11)
- Not designed to create a situation that can be sustained in practice
"[45]...The redefinition under the Halifax principle is not designed to create a situation which can be sustained in practice. It is a purely notional device, for the purpose of assessment to tax, that may inevitably involve ignoring the terms of existing contracts..." (HMRC v. Atrium Club Limited [2010] EWHC 970 (Ch), Roth J)
- Not necessarily one right way of redefining
"[44] I asked Mr Pleming whether the question of the correct redefinition is a matter of law on which there is only one answer, or whether it is rather a case of possible alternative ways of redefining the transactions subject to review by the court on principles analogous to Wednesbury. I am told that there is no authority directly bearing on this issue. However, some guidance can be derived from the consideration of redefinition (also obiter) by Lord Neuberger in WHA. After discussing two possible redefinitions that were there suggested, he concluded (at [58]): "… either of the two proffered redefinitions appears to me acceptable." That strongly suggests that there is not necessarily one right way of redefining a scheme." (HMRC v. Atrium Club Limited [2010] EWHC 970 (Ch), Roth J)
Extent of redefinition
- Redefinition must not amount to a penalty
"[93] It must also be borne in mind that a finding of abusive practice must not lead to a penalty, for which a clear and unambiguous legal basis would be necessary, but rather to an obligation to repay, simply as a consequence of that finding, which rendered undue all or part of the deductions of input VAT (see, to that effect, Emsland Stärke , paragraph 56).
[94] It follows that transactions 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." (Halifax Plc C-255/02)
- Tax authority must give credit for any output tax that would not have been due but for the artificially (and repay any excess)
"[95] In that regard, the tax authorities are entitled to demand, with retroactive effect, repayment of the amounts deducted in relation to each transaction whenever they find that the right to deduct has been exercised abusively ( Fini H , paragraph 33).
[96] However, they must also subtract therefrom any tax charged on an output transaction for which the taxable person was artificially liable under a scheme for reduction of the tax burden and, if appropriate, they must reimburse any excess." (Halifax Plc C-255/02)
- Tax authority must give credit for any input tax which would have been deductible apart from abusive transactions
"[97] Similarly, it must allow a taxable person who, in the absence of transactions constituting an abusive practice, would have benefited from the first transaction not constituting such a practice, to deduct, under the deduction rules of the Sixth Directive, the VAT on that input transaction." (Halifax Plc C-255/02)
- Even if time limits for relevant claims have passed
"[30]...Redefinition, if properly and completely implemented, requires that the taxpayer's returns for each of the relevant periods are adjusted "so as to re-establish the situation that would have prevailed in the absence of the transactions constituting [the] abusive practice". If the process results (as may be the case here) in repayment returns for some periods and payment returns for others I see nothing which offends the domestic legislation in the Commissioners' collecting the overall net amount which is due or, as necessary, paying over the net sum due to the taxpayer. Nor do I see any practical or legislative impediment to redefinition by this means. It mirrors what the Commissioners were proposing to do, had Moorbury made a voluntary disclosure, as it is set out in the extract of their letter of 26 April 2001 which appears above.
The Commissioners' approach, by contrast, risks injustice to a taxpayer. The process of redefinition will, naturally, always be initiated by a taxing authority. If (as in this case) the output tax liability was declared before the input tax credit (or most of it) was claimed, it might so happen that it is possible to assess for what is due from the taxpayer, but the taxpayer is out of time to make a claim in accordance with s 80. In my view a one-sided redefinition, which would be the result in such a case, is not what the Court of Justice had in mind, and the risk alone seems to me to indicate that the Commissioners' argument is wrong. The neutrality of VAT, to which the Court referred at para 92 of its judgment, would be offended if redefinition had a one-sided result." (Moorbury v. HMRC [2009] UKFTT 180 (TC), Judge Bishopp)
Types of redefinition
- Strip out inserted companies from supply chain
"[42] The simplest redefinition which corrects the abusive features of the scheme is to strip out the four Captive Leasing Companies (which leased the cars to the dealership companies at Step 2 and assigned the leases to SGJ at Step 3), and Captive Co 5 (which took the transfer of SGJ's leasing business at step 4 and sold the used cars to the consumer at Step 5). Instead, it will be assumed (i) that the cars were sold by Pendragon plc to the dealership companies; (ii) that the dealership companies sold them to SGJ and then took them back from SGJ on lease; (iii) that the lease term was 45 days (the maximum period for which finance was provided under the actual arrangements); (iv) that the final payment repaid the capital amount of the SGJ's advance with interest; (v) that title in the cars passed back to the dealership companies seven days thereafter (the interval after the termination of the leases actually agreed for the exercise of the option to purchase); and (vi) that the dealership companies then sold them as used cars to consumers. On that footing, the Dealership Companies should have accounted for output tax on a sale to SGJ, and reclaimed input tax including the tax incurred on the purchase from Pendragon. Article 8(2) of the Cars Order will not apply, and the Dealership Companies will be accountable for VAT on the full second-hand price.
[43] I would allow the appeal. Any other VAT consequences of the redefined transaction which cannot be agreed between the parties should be referred to the First Tier Tribunal for determination. I would invite the parties to agree an appropriate form of declaration, or in default of agreement to make submissions on the form of declaration in writing within two weeks." (HMRC v. Pendragon Plc [2015] UKSC 37)
- Treat supplies as made by company that carried on business before transfer to non-profit
"[45]...Once it is acknowledged that the essential aim of the WJB Scheme was the avoidance of VAT, and that the transactions created by that scheme to introduce AAB as the supplier of services that remitted the net proceeds to Atrium were the basis on which the abusive practice was constituted, it seems to me that a permissible view of what would have prevailed in the absence of those transactions is that AAB would never have been interposed in the supply at all. The Club would have been operated by Atrium, as it had been before the previous, abortive AIC scheme was introduced. It may be that the Bradneys would have, as it were, taken a back seat and left the running of the Club to Ms Forman and Mr Flude, but that is irrelevant for present purposes." (HMRC v. Atrium Club Limited [2010] EWHC 970 (Ch), Roth J)
"[107]...We uphold Judge Mosedale’s finding that this scheme was an abuse of law within the Halifax principle. HMRC were therefore correct to re-define the transactions and there was no challenge to their redefinition, which is to treat the supplies made by the Companies as having been made by the Partnership between 1 June 2001 and 31 May 2005 and by the LLP between 1 June 2005 and 31 August 2007." (Massey v. HMRC [2015] UKUT 405 (TCC), Rose J and Judge Sinfield)
- Vary contractual terms (e.g. level of consideration for lease intended to defer irrecoverable VAT liability)
"[51] Thus, if the national court concluded that certain contractual terms of the leasing transactions at issue in the main proceedings and/or the intervention of Suas in those transactions constituted an abusive practice, that court would have to redefine those transactions disregarding the existence of Suas and/or by varying or disapplying those contractual terms.
[52] In that context, the redefinition by that court must go no further than is necessary for the correct charging of the VAT and the prevention of tax evasion (see, to that effect, Halifax and Others, paragraph 92)." (Weald Leasing C-103/09)
- Disregard of artificially inserted sale and leaseback prior to first sale
"[79] Thus, only the first supply of a building or part of a building is, in principle, subject to VAT; however, in order to determine which supply is the first one, account should not be taken of supplies of a purely artificial nature whose essential aim is to obtain a tax advantage." (Cussens C-251/16)
Refusal of a right and redefinition
EXAMPLES
- Refusal of right to exemption for small traders: redefinition entails company is subject to VAT and has right to deduct
"[41] The Court has also stated that application in the sphere of VAT of the principle of the prohibition of abusive practices entails, first, determining the situation that would have prevailed in the absence of the transactions constituting such a practice and then assessing that ‘redefined’ situation in the light of the relevant provisions of national law and of the VAT Directive (see by analogy, judgment of 22 November 2017, Cussens and Others, C‑251/16, EU:C:2017:881, paragraph 47).
[42] In the present case, those principles entail, at the very least, that the company whose formation constitutes an abusive practice is subject to the VAT which would have been applicable in the absence of such abuse and also benefits, if the conditions are satisfied, from the right to deduct the input VAT due or paid relating to the activity which it carries out, which it is for the referring court to ascertain." (UP Caffe C-171/23)
VAT examples
- Establishing non-profit company to make exempt supplies to public + paying that company's turnover to original company by exempt lease of land abusive
"[34] ... Accordingly, I consider that the scheme resulted in Atrium achieving a real benefit. And, in my judgment, that benefit is properly to be regarded as a tax advantage since Atrium was not liable to pay VAT on the fee under the Turnover Licence whereas AAB, although - contrary to the parties' understanding – not within the sporting exemption and thus liable to account for VAT on the Club's supplies, had by payment of that fee removed its ability to discharge such a liability. It seems to me that an arrangement which results in that situation is contrary to the purpose of the exempting provisions in the Sixth Directive.
...
[39]...However, although I accept that the Bradneys may have been keen to give up actually running the business, in other respects these contentions are inconsistent with the factual findings by the Tribunal as to the nature of the Turnover Licence and its terms, and the way the fee was calculated so as to represent all profits from running the Club. The focus under this question is on the arrangements comprising the scheme. The essential aim of those arrangements was to implement a mechanism whereby the net proceeds of the business continued to accrue to the Bradneys' company, Atrium, with the benefit of exemption from VAT.
I also agree with the Tribunal that there are no special features here which should otherwise prevent the abuse arguments from succeeding, and indeed none have been suggested on behalf of Atrium." (HMRC v. Atrium Club Limited [2010] EWHC 970 (Ch), Roth J)
- Leasing on commercial terms rather than buying to defer irrecoverable VAT not abusive
"[45] In those circumstances, the answer to the first and second questions is that the tax advantage accruing from an undertaking’s recourse to asset leasing transactions, such as those at issue in the main proceedings, instead of the outright purchase of those assets, does not constitute a tax advantage the grant of which would be contrary to the purpose of the relevant provisions of the Sixth Directive and of the national legislation transposing it, provided that the contractual terms of those transactions, particularly those concerned with setting the level of rentals, correspond to arm’s length terms and that the involvement of an intermediate third party company in those transactions is not such as to preclude the application of those provisions, a matter which it is for the national court to determine. The fact that the undertaking does not engage in leasing transactions in the context of its normal commercial operations is irrelevant in that regard." (Weald Leasing C-103/09)
- Sale and leaseback to connected person which are terminated shortly thereafter to allow subsequent sale to access exemption
"[79] Thus, only the first supply of a building or part of a building is, in principle, subject to VAT; however, in order to determine which supply is the first one, account should not be taken of supplies of a purely artificial nature whose essential aim is to obtain a tax advantage." (Cussens C-251/16)
Tax (other) examples
- Exporting goods then reimporting them to obtain a refund on agricultural products can be abuse
"[73] That is so, for example, where the completion of customs formalities does not fall within the context of normal commercial transactions but is purely formal and is designed solely to obtain wrongfully the grant of compensatory amounts (see, to that effect, judgments of 27 October 1981, Schumacher and Others, 250/80, EU:C:1981:246, paragraph 16, and of 3 March 1993, General Milk Products, C‑8/92, EU:C:1993:82, paragraph 21) or export refunds (see, to that effect, judgment of 14 December 2000, Emsland-Stärke, C‑110/99, EU:C:2000:695, paragraph 59)." (T Danmark C-116/16)
"[56] Contrary to the assertions of Emsland-Stärke, the obligation to repay refunds received in the event that the two constituent elements of an abuse are established would not breach the principle of lawfulness. The obligation to repay is not a penalty for which a clear and unambiguous legal basis would be necessary, but simply the consequence of a finding that the conditions required to obtain the advantage derived from the Community rules were created artificially, thereby rendering the refunds granted undue payments and thus justifying the obligation to repay them.
[57] Moreover, the argument that a demand for repayment cannot be addressed to the Community exporter on the ground that he did not re-import the goods cannot be accepted either. The re-importation of the goods is only one of the circumstances which demonstrate that the objective of the rules has not been achieved. Moreover, it is the exporter who enjoys the undue advantage of the grant of export refunds when he carries out an artificial operation in order to benefit from that advantage." (Emsland-Stärke C-110/99)
- Insertion of a conduit company into group to access dividend exemption
"[100] A group of companies may be regarded as being an artificial arrangement where it is not set up for reasons that reflect economic reality, its structure is purely one of form and its principal objective or one of its principal objectives is to obtain a tax advantage running counter to the aim or purpose of the applicable tax law. That is so inter alia where, on account of a conduit entity interposed in the structure of the group between the company that pays dividends and the company in the group which is their beneficial owner, payment of tax on the dividends is avoided." (T Danmark C-116/16)
Non-tax examples
- Choosing to qualify as a lawyer in Member State with more favourable access rules and then relying on EU directive for mutual recognition not abuse of law
"[48] In that regard, it must be held that the right of nationals of a Member State to choose, on the one hand, the Member State in which they wish to acquire their professional qualifications and, on the other, the Member State in which they intend to practise their profession is inherent in the exercise, in a single market, of the fundamental freedoms guaranteed by the Treaties (see, to that effect, the judgment in Commission v Spain, C‑286/06, EU:C:2008:586, paragraph 72).
[49] Accordingly, the fact that a national of a Member State who has obtained a university degree in that State travels to another Member State, in order to acquire there the professional qualification of lawyer, and subsequently returns to the Member State of which he is a national in order to practise the profession of lawyer under the professional title obtained in the Member State where that qualification was acquired, constitutes one of the possible situations where the objective of Directive 98/5 is achieved and cannot constitute, in itself, an abuse of the right of establishment stemming from Article 3 of Directive 98/5.
[50] Further, the fact that the national of a Member State has chosen to acquire a professional qualification in a Member State other than that in which he resides in order to benefit there from more favourable legislation is not, in itself, as stated by the Advocate General in points 91 and 92 of his Opinion, sufficient ground to conclude that there is an abuse of rights.
[51] Further, that finding cannot be called into question by the fact that the submission of the application for registration in the register of lawyers qualified abroad held by the competent authority of the host Member State took place soon after the professional title was obtained in the home Member State. As stated by the Advocate General in points 93 and 94 of his Opinion, there is no provision in Article 3 of Directive 98/5 to the effect that the registration of a lawyer wishing to practise in a Member State other than that in which he acquired his professional qualification with the competent authority of the host Member State may be subject to the condition that a period of practical experience as a lawyer in the home Member State has been completed." (Torresi C-58/13)