HM Revenue and Customs v The Atrium Club Ltd

For the purposes of the Halifax principle, a VAT scheme must be assessed as a whole. An individual step may fail without preventing abuse where the arrangements nevertheless produce the intended tax advantage. The relevant advantage must be characterised accurately, including benefits obtained through inter-related exempt supplies. The essential aim is assessed objectively from the arrangements and their factual context. If abuse is established, the court must redefine the arrangements to neutralise the tax advantage and restore the position that would have prevailed without the abusive transactions. Redefinition is a notional tax device and may disregard contractual arrangements.

HMRC appealed against the decision of the VAT and Duties Tribunal dated 21 January 2009, which had allowed The Atrium Club Ltd’s appeal against a VAT assessment. The Tribunal rejected HMRC’s alternative case that arrangements involving AAB Sports Ltd constituted an abusive practice under the Halifax principle. Although AAB made the sporting supplies, the arrangements transferred the resulting net proceeds to Atrium through a turnover licence. The issue was whether the scheme produced a tax advantage contrary to the purpose of the VAT exemptions, whether obtaining that advantage was its essential aim, and, if so, how the arrangements should be redefined.

1. The appeal was allowed. The supplies of sporting services made by AAB Sports Ltd were redefined for VAT purposes as supplies made by Atrium.

2. The Halifax principle requires consideration of the scheme as a whole. The relevant questions are whether the scheme produced a tax advantage contrary to the purpose of the applicable provisions, whether obtaining that advantage was its essential aim, whether any special features prevented the abuse argument succeeding, and whether the scheme could and should be redefined. The approach in WHA Ltd v R&CC [2007] EWCA Civ 728 was adopted, subject to the qualification that its discussion of individual steps was not to be applied literally.

3. The relevant tax advantage was not confined to the sporting supplies being exempt. The inter-related arrangements were designed to secure for Atrium the net proceeds of the Club’s business without VAT. The turnover licence was integral to that advantage because it transferred the benefit of the supplies to Atrium without VAT. That advantage was contrary to the purpose of the exemptions.

4. The essential aim of the arrangements was to obtain that tax advantage. The contractual terms, the method of calculating the licence fee and the factual findings concerning the scheme showed that the arrangements were designed to ensure that the net proceeds continued to accrue to Atrium with the benefit of VAT exemption. No special feature prevented the application of the abuse principle.

5. The fact that AAB’s sporting supplies were ultimately standard-rated did not prevent the Halifax principle applying. The scheme produced a real tax benefit for Atrium even though one intended step had failed.

6. Redefinition under Halifax was mandatory where abuse was established. It was a notional device for tax assessment and did not have to create a commercially sustainable real-world arrangement. It could therefore disregard the contracts introducing AAB and treat the Club as operated by Atrium. There was not necessarily only one permissible method of redefinition.

• High Court (Chancery Division): allowed HMRC’s appeal from the VAT and Duties Tribunal decision dated 21 January 2009 and redefined the supplies as made by Atrium.