WHA Ltd & Anor v Revenue and Customs

A VAT arrangement constitutes an abusive practice where, despite formal compliance with the applicable provisions, it produces a tax advantage contrary to their purpose and objective factors show that obtaining that advantage was its essential aim. The arrangement must be considered as a whole. Its individual transactions may remain genuine and effective when viewed separately.

The principle applies where the advantage depends upon domestic legislation intended to implement an EU VAT directive, even if that legislation transposes the directive imperfectly. Once abuse is established, the arrangement must be neutralised or redefined to restore the position which would otherwise have prevailed. A specific counterfactual need not be selected where the tax has already been fully paid and no consequential rights remain to be determined.

Companies in the same group established a scheme concerning motor breakdown insurance, reinsurance and claims handling. It inserted a second Gibraltar company, Viscount, into both the reinsurance arrangements and the claims-handling chain. The intended VAT result was that Viscount could recover input tax paid by the English claims handler, WHA.

The VAT and Duties Tribunal decided in favour of the revenue authority. Lloyd J allowed the taxpayers’ appeal. In the first part of the Court of Appeal proceedings, reported at [2004] STC 1081, the court held that, if the arrangements were taken at face value, Viscount could recover the input tax.

Following the decision in Halifax plc v Customs and Excise Commissioners, the court considered the reserved question whether the scheme was an abusive practice, whether any further consideration prevented that conclusion, and whether the scheme had to be redefined.

1. Appeal allowed. The scheme was an abusive practice and Viscount was not entitled to recover the input VAT paid by WHA. The financial consequences of the Tribunal’s decision were reinstated, although for reasons differing from those adopted by the Tribunal. Latham and Waller LJJ agreed with Lord Neuberger’s judgment.
2. The scheme produced an advantage contrary to the purpose of the EU VAT system. Insurance services supplied in the EU were exempt, while the scheme enabled input tax attributable to those services to be recovered. That outcome offended the principles that VAT should ultimately be borne by the final consumer and that similar supplies should bear the same tax burden.
3. The abuse inquiry required the scheme to be assessed as a whole. The rule that individual transactions are ordinarily analysed separately remained sound for determining their conventional VAT consequences. It could not prevent an abuse inquiry, whose purpose was to examine whether the combined effect of individually effective steps was unacceptable.
4. The objective evidence established that tax minimisation was the scheme’s sole purpose. Viscount’s interposition as an 85% retrocedent and as an additional link in the claims-handling chain had no material commercial purpose. Any asserted cash-flow, capitalisation or organisational benefits were absent, insignificant or merely collateral. A genuine underlying insurance business did not prevent artificial elements introduced solely for tax avoidance from constituting abuse.
5. The abuse principle applied notwithstanding the engagement of Article 17(3) rather than Article 17(2) of the Sixth Directive. It also applied where the advantage depended upon domestic provisions intended to implement EU VAT directives, even if the transposition was imperfect. Freedom of establishment did not protect the artificial use of an established company to abuse the VAT system.
6. Once the two Halifax conditions were satisfied, the abusive scheme had to be neutralised. No specific redefinition was needed because all tax due had been paid, no overpayment had occurred and no third-party rights required adjustment. If redefinition had been necessary, either removing Viscount or disregarding the artificial claims-handling chain could have produced an acceptable VAT result.

1. Court of Appeal (Civil Division): On the reserved second part of the appeal, the court unanimously allowed HMRC’s appeal, held the scheme abusive and reinstated the financial consequences of the Tribunal’s decision.
2. Court of Appeal (Civil Division), first part: In the decision reported at [2004] STC 1081, the court held that the scheme, if taken at face value and subject to the reserved abuse issue, enabled Viscount to recover the relevant input tax.
3. High Court, Chancery Division: Lloyd J allowed the taxpayers’ appeal from the Tribunal. He did not determine the abuse issue.
4. VAT and Duties Tribunal: The Tribunal decided in favour of the revenue authority. Its legal approach to abuse preceded the later guidance from the European Court of Justice.