Massey: VAT planning and abuse

The Upper Tribunal (UT) has applied the Halifax abuse principle to recharacterise arrangements involving the supply of sporting services at a golf course.

This allowed VAT to be recovered from a person other than the suppliers of the services (which had gone into liquidation) even though the arrangements were later agreed to be ineffective to remove liability for VAT under the relevant legislation.

Restructuring of a golfing business

A partnership (Hilden), which ran a golf course as a business making VATable supplies, transferred its golfing business to two companies in order to take advantage of the business of sports exemption contained in Group 10 Schedule 9 VATA 1994 for supplies of certain services closely linked to sport or physical education supplied by non-profit-making organisations.

The two companies in question were limited by guarantee and were prohibited from distributing profits by their constitutional documents. It was initially considered that this brought them within the definition of "non-profit-making bodies" for the purposes of the exemption.

Hilden retained the golf course and let it to the two companies, which paid rent. The rent was the higher of £364,000 per annum or 50 per cent of the companies' annual turnover; considerably higher than a commercial rent. In practice, the companies were invoiced what they could afford to pay and so, in effect, the rent operated as a profit-stripping mechanism.

Hilden's contention was that, as a result of this restructuring, it was now making exempt supplies of land, while the two purportedly non-profit-making companies made exempt supplies of sport services. HMRC attacked these arrangements on the grounds that they were abusive.

Effectiveness of scheme is not a prerequisite for abuse

The companies were, it was subsequently agreed, profit-making after all. The consequence of this was that VAT should have been charged on their supplies of sporting services and was thus owed to HMRC. However, relying on a straight application of the legislation to show that the scheme failed to work as intended on a technical analysis would leave HMRC unable to recover the unpaid VAT from the liquidated companies.

As it was, the judge considered that it is not necessary for the scheme as a whole to work for there to be abuse.

Specifically, a tax advantage contrary to the VAT Directives had still been obtained, i.e. that VAT was not paid on eligible sporting supplies, and the benefit of these supplies had accrued to Hilden in the form of higher rents than would otherwise have been achievable. These VAT-free rents were an inherent part of the scheme as they effectively stripped the profit out of the companies, as well as depriving them of the means to pay any liability to VAT that could arise.

This is a potentially wide extension of the abuse principle which could be significant in allowing HMRC to recover unpaid VAT from other parties to transactions, even where the VAT position would not normally be in dispute.

However, it may be that the decision is not as far-reaching as first appears. The focus of this decision was on the shifting of profits from taxable sporting supplies into a genuinely exempt supply of land via the mechanism of the uncommercial rents. Where none of the elements of a scheme meet the legislative requirements to obtain the desired tax consequences, it would be harder to show that a tax advantage had been obtained and therefore the scheme should be less susceptible to redefinition on the grounds of abuse.

Applying the abuse principle

The test for abuse, as set out in Halifax, is that: (i) there must be a tax advantage contrary to the VAT Directives (as discussed above); and (ii) the essential aim of the transactions is to obtain a tax advantage.

The judge referred to Lord Sumption's comments in Pendragon that, when deciding whether the essential aim of the transaction has been to obtain a tax advantage, "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".

The UT concluded that the First Tier Tribunal had been right to find that the essential aim of the arrangements had been to obtain a tax advantage, as they were artificial and inconsistent with normal commercial practice. In particular, that the rent payable was more than commercial rent and more than the companies could afford to pay, and that Hilden accepted whatever amount the companies could afford.

Redefining the arrangements so that the supplies were treated as made directly by Hilden is self-evidently the pragmatic answer to ensuring that HMRC could recover the VAT on the sporting supplies in this particular situation.

It would be concerning if this were to be a move towards secondary liability by the back door. However, it is more likely that schemes which do not involve an effective element of exemption or relief (such as the exempt supply of land here) will continue to be attacked under the letter of the law, rather than by recharacterisation.

Massey/Hilden Park -v- HMRC

Please click on the links below for the other articles in the September 2015 tax newsletter:

• Changes to fund returns
• Larentia + Minerva: recovery of VAT by holding companies
• Intelligent Managed Services: TOGCs and intra-group supplies
• Improving large business tax compliance - a consultation document
• Qualifying private placement withholding tax exemption