Tuesday, April 12, 2005

Avoidance and VAT (I)

According to the Advocate General, the Community principle of abuse of law may affect the time of chargeability of VAT and the right to deduction. The Advocate General of the European Court of Justice (ECJ) gave his opinion on 7 April 2005 in three high profile UK cases concerning transactions carried out with the aim to reduce the VAT burden.
Breif description of the facts of the cases:
Halifax (C-255/02)
Halifax was a company carrying out financial transactions predominantly exempt under Art. 13(B)(d) of the Sixth VAT Directive. Less than 5% of its input VAT was deductible. For the purpose of acquiring four call centres located in the United Kingdom, Halifax entered into a series of transactions involving three subsidiaries as a result of which the VAT incurred on the construction would be fully deductible.
BUPA Hospitals Ltd (C-419/02)
BUPA Hospitals Ltd managed a number of private hospitals. Its supplies of drugs and prostheses in UK private hospitals were zero rated until 1997. From 1 January 1998, the zero rate was replaced with an exemption, under which BUPA could no longer deduct input VAT. In September 1997, BUPA entered into a contract for the supply of large amounts of unspecified drugs and prostheses to be made by connected companies and to be delivered in 1998 to 2001. The contract included an advance payment which determined the time of supply and, consequently, that of deduction at the time the payment was made. The advance payment was financed through a loan granted by another entity that formed part of the BUPA VAT group.
University of Huddersfield (C-223/03)
The University of Huddersfield was a higher education establishment, whose educational services were generally exempt from VAT. Its rate of input tax deduction had fallen from 14.5% to 6%. For the purpose of achieving full input tax deduction in respect of the construction of two buildings, the university leased the buildings to a connected trust which leased them back to the university.
Although the facts and the tax planning mechanisms were different, the questions referred to the ECJ by the UK VAT and Duties Tribunals of London and Manchester, and the High Court of Justice of England and Wales concerned similar issues. The principal questions were whether or not transactions carried out for the sole purpose of avoiding VAT ,or of ensuring the availability of deductions in respect of goods used for the purpose of carrying out exempt transactions constitute economic activities; and, if they do, whether or not their VAT treatment is affected by the doctrine of abuse of law as developed by the ECJ.
Advocate General's opinion:
Since Art. 4 of the Sixth VAT Directive defines the concept of taxable persons as anyone who independently carries out economic activities, whatever the purpose or results, the Advocate General concluded that the fact that supplies are made with the sole intention of obtaining a tax advantage is immaterial. In that context, each of the transactions at issue must be considered objectively and per se.
As regards the right to deduct input VAT, the Advocate General concluded that under the Community principle of abuse of law that right should not be conferred on taxable persons if two objective elements are found present by the national courts: i.e. (i) the aims and results pursued by the legal provisions formally giving rise to the right to deductions would be frustrated if that right were actually conferred; and (ii) the right to deductions is derived from activities for which there is no other explanation than the creation of that right.

Now remains to be seen the impact of these conclusions on the direct taxation directives?


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