Supreme Court rules against aggressive tax avoidance scheme

01/05/13

Revenue and Customs scored a victory in its ongoing fight against aggressive tax avoidance schemes on 1 May 2013 when the Supreme Court dismissed an appeal in WHA v HM Revenue & Customs [2013] UKSC 24.

The case concerned a UK insurance group which entered into a complex series of transactions with Gibraltar-based reinsurers to enable VAT to be reclaimed on motor breakdown insurance supplied to UK motorists, contrary to the normal VAT treatment of insurance. Gibraltar is part of the EU for some purposes but for VAT purposes it is treated as a non-EU jurisdiction.

In February 2006, the ECJ ruled, in test cases involving Halifax (the UK banking group), that businesses engaging in transactions with the deliberate aim of avoiding VAT were in breach of the EU law principle of abuse of rights - but that ruling had yet to be considered by the UK higher courts.

The Court of Appeal had found in an interim judgment in the WHA case in 2004 ([2004] EWCA Civ 559) that the WHA VAT avoidance scheme succeeded at face value, but adjourned a final decision until after judgment had been handed down by the Court of Justice in Halifax.

The Court re-opened the hearing after Halifax and, in a judgment written by Lord Neuberger ([2007] EWCA Civ 728), agreed with the Revenue's argument that although the Gibraltar deals had commercial benefits they were consequential and the real purpose of the transactions was to avoid tax. The scheme was thus contrary to the EU law abuse of right principle.

The hearing before the Supreme Court took place after the UK government had successfully defended a European Commission challenge to amendments made to UK legislation implementing the 13^th VAT Directive as a consequence of the Court of Appeal's 2004 judgment (Case C-582/08 Commission v United Kingdom [2010] ECR I-7195).

The Supreme Court rejected WHA's request for a reference to the ECJ on 29^th November 2011. The main hearing of the appeal took place in January 2013.

Lord Reed, giving the sole judgment of the Supreme Court, reversed the Court of Appeal's 2004 judgment and held that the WHA VAT avoidance scheme did not succeed at face value. There was therefore no need to address the EU law abuse of right principle, on which the Court of Appeal's 2007 judgment therefore remains the leading authority in English law. Nor was it necessary to consider the other issues raised in the appeal (abuse of right, effect of ultra vires legislation and legitimate expectations).

The judgment is here.

The Supreme Court YouTube summary is here.