The UK VAT Tribunal has delivered its judgment in the Weald Leasing case, which concerned lease and lease-back arrangements for deferring irrecoverable VAT on equipment used in an insurance business.
The Tribunal has ruled that the scheme is not an "abusive practice".
This is an important judgement but we have to get it in perspective.
Weald Leasing (“W”) is a subsidiary of “C”, a leading UK insurance company.
C has the problem of not being able to recover input tax.
C was to become exposed to the VAT on some I.T. hardware.
C could defer the charge by having W purchase the hardware and lease it to C.
If option 4 is used HMRC have powers to direct an open market value upon the lease installments.
C thought it better that the value of the lease installments is less than the open market value.
W leased the goods to a stooge, “S”, a wholly owned subsidiary of the tax advisers for a small fee.
“S” leased the goods to “C” with a small mark-up.
How does it work?
What was HMRC’s argument?
W was not entitled to recover the input tax on the goods as it was using them to enter into an abusive practice (Halifax plc). The abuse lies with respect to Article 17 (as it then was) of the Sixth Directive, the right to deduct. Accordingly HMRC assessed W for its input tax recovery.
What was the Tribunal’s verdict?
HMRC were barking up the wrong tree. They should have sought to uplift the output tax on the bargain basement leases. They have powers to direct a value and should have used them. There was nothing abusive about the deduction of input tax against goods bought for an onward lease to a third party.
Will HMRC appeal to the High Court?
Understandably HMRC have appealed. Meanwhile they are telling advisers not to get too excited about the judgement, perhaps because they don’t want to see it widely marketed.
What does thevatman.com think?
The Tribunal was right in that the deduction of input tax was not in its own right abusive. What this scheme has served to do is highlight the inadequacy of HMRC’s anti-avoidance provision in Schedule 6. This is a matter for HMRC to address along with a less obvious flaw in that particular piece of legislation.
HMRC has the right to direct a value, but only between connected parties. The introduction of S into the supply chain has served to undermine its powers of direction. They have probably missed the boat to assess the output tax in any event, because of the 1-year capping provisions, as there is no new information.
The benefit of deferring the tax is quite reasonably the immediate deduction of input tax. Had the lease from W been made to C at the open market value, C would have put itself in the same position as it would be in had it leased the goods from a bank. This would not be abusive. C could reasonably argue that the commercial rationale is to have complete control of the assets while retaining the cashflow advantage of leasing them.
C became greedy in its determination of the value of lease instalments, and we suspect there may have been an underlying intention to collapse the leases before all the payments became due.
We believe that the scheme as a whole qualifies for abusive practice as defined by the ECJ in Halifax et al. This is because C has taken advantage of the right to deduct while artificially negating the downside – the tax on the lease instalments. We suspect HMRC’s first choice argument will be that the input tax deduction was abusive in the light of the value of the lease instalments. Interestingly, they may well have a sustainable argument to say the abuse lies with the First Directive – distortion of competition.
Does the judgement lend itself to other arrangements?
HMRC have for many years maintained that deferment of the tax is avoidance. This judgement makes it clear that there is no abuse if a commercial valuation is applied to the lease. We believe that it will lend itself to deferment of the tax on such items as cars and free-standing ATM machines.