HM Revenue & Customs v Weald Leasing Ltd

In VAT abuse cases, the fact that transactions are artificial, commercially hollow, outside normal commercial operations and designed solely to obtain a tax advantage does not, by itself, establish abusive practice.

The court must apply the two-part test in Halifax plc and Others v Customs and Excise Commissioners [2006] STC 919: the transactions must produce a tax advantage contrary to the purpose of the relevant provisions, and their essential aim must be to obtain that advantage. A tax deferral achieved through leasing may remain permissible where the resulting VAT is duly accounted for and fiscal neutrality is not undermined.

Weald Leasing Limited appealed against VAT assessments raised by HM Revenue and Customs. Weald had acquired assets, claimed input-tax deductions, and leased the assets through Suas Limited to related exempt traders, Churchill Accident Repair Centre and Churchill Management Limited.

The London Tribunal Centre allowed Weald’s appeal, holding that the arrangements did not justify redefinition under the abuse doctrine. Before the High Court, HMRC accepted that the scheme’s sole aim was to obtain a tax advantage, but argued that its artificiality and lack of normal commercial operations made the advantage abusive under Halifax plc and Others v Customs and Excise Commissioners [2006] STC 919. The central issue was whether the absence of normal commercial operations, coupled with the admitted tax aim, was sufficient without further evidence that the advantage defeated the purpose of the VAT legislation.

1. Appeal dismissed. The tribunal had made findings of fact favourable to HMRC concerning the artificial and commercially hollow nature of the arrangements. Those findings did not establish an abusive practice.
2. Per Lindsay J, Halifax plc and Others v Customs and Excise Commissioners [2006] STC 919 required two elements: the transactions must produce a tax advantage whose grant would be contrary to the purpose of the relevant VAT provisions, and objective factors must show that their essential aim was to obtain that advantage. The second element was admitted, but the first was not proved.
3. The references in Halifax to normal commercial operations did not create an additional or automatic test. Whether arrangements were outside normal commercial operations was an uncertain and subjective inquiry. It could not replace the requirement to show that the tax advantage was contrary to the purpose of the Sixth Directive and the domestic implementing legislation.
4. The exempt traders were entitled to choose leasing rather than purchasing assets. Leasing spread irrecoverable VAT over the rental periods. The VAT on the supplies, leases and subleases was accounted for, and the court found no breach of fiscal neutrality. The lower aggregate VAT resulting from low rentals did not, without more, establish abuse.
5. The court relied on WHA Limited & Another v Revenue and Customs Commissioners [2007] STC 1685 for the need to view the scheme as a whole and to pay particular attention to artificial elements. That authority did not establish that the present leasing arrangement was abusive.
6. The more focused potential abuse was the combination of over-low rentals and Suas’s interposition, which prevented a revaluation under Schedule 6 paragraph 1 of the 1994 Act. HMRC had not advanced that case as its principal argument. A comprehensive redefinition would therefore have been unjustified. If redefinition had been necessary, it should have been limited and proportionate, addressing only the under-valued rentals and not treating the transactions as if they had never occurred.

• High Court (Chancery Division): HM Revenue and Customs’ appeal from the London Tribunal Centre was dismissed.
• London Tribunal Centre: The tribunal allowed Weald’s appeal against the assessments and held that no redefinition was appropriate.