University of Huddersfield Higher Education Corp. v Revenue And Customs

The abuse-of-rights principle applies to a VAT scheme viewed as a whole. It requires both that the scheme produces a tax advantage contrary to the purpose of the relevant VAT provisions and that obtaining a tax advantage is its essential aim.

For a partially exempt trader, artificial transactions with no commercial function beyond securing full input-tax recovery cannot convert expenditure relating to exempt activities into fully deductible expenditure. A genuine commercial choice to lease an asset may produce an intended cash-flow advantage, but that reasoning does not protect a contrived leaseback of an asset already owned. Redefinition removes abusive steps actually taken; it does not substitute a hypothetical financing structure.

The University, which mainly supplied VAT-exempt education, created a trust and a lease-and-underlease structure for the refurbishment of East Mill. It claimed full recovery of input VAT by treating the refurbishment as linked to a taxable lease, although the property was used for the University's mainly exempt activities.

The First-tier Tribunal held that the arrangements were not an abuse of rights in its later decision at [2013] UKFTT 429 (TC), reported at [2014] SFTD 78. The Upper Tribunal, in [2014] UKUT 438 (TCC), reported at [2015] STC 307, reversed that decision. The central issues were whether the arrangements constituted an abusive tax advantage, whether the advantage was deferral or an intended absolute saving, and how the transactions should be redefined.

The Court of Appeal, Lewison LJ giving the judgment and David Richards LJ agreeing, dismissed the appeal.

1. The court applied the two cumulative requirements for abuse of rights. The scheme must produce a tax advantage contrary to the purpose of the relevant VAT provisions, and obtaining that advantage must be its essential aim. The whole arrangement must be examined, including the contemplated collapse of the leasehold structure.
2. The relevant advantage was the University's ability to deduct the whole of the input tax on the refurbishment, rather than only the small proportion available to a mainly exempt supplier. The built-in ability and intention to collapse the structure meant that this was an intended absolute saving, not merely a possible future saving or a cash-flow deferral. The scheme was abusive from the outset.
3. The purpose of the VAT system includes fiscal neutrality. Under article 17 of the Sixth Directive, deduction is linked to use for taxable transactions. A partially exempt trader cannot obtain full recovery of input tax relating in reality to exempt activities by creating an artificial taxable supply with no commercial purpose. That result would defeat the purpose of the VAT provisions.
4. HMRC v Weald Leasing Ltd [2011] STC 596 concerned a genuine commercial choice between acquiring equipment outright and leasing equipment which the relevant companies did not already own. Its reasoning concerning the spreading of irrecoverable VAT did not assist a contrived leaseback which had no commercial or practical effect beyond securing the tax advantage. The object, effects and purpose of the transactions had to be considered.
5. Redefinition required removal of the abusive trust and leasehold steps actually used. It did not permit the court to rewrite the history or replace the arrangement with a hypothetical arm's-length financing package.
6. The characterisation of the tax advantage was not a pure question of fact. Once the Upper Tribunal identified an error of law in the First-tier Tribunal's approach, it could use the primary facts, set aside the decision and remake it. It was entitled to reach its own conclusions. A further point raised by HMRC was unnecessary to decide and was left for another case.

The appeal was dismissed.

1. Court of Appeal (Civil Division): dismissed the University's appeal.
2. Upper Tribunal (Tax and Chancery Chamber): in [2014] UKUT 438 (TCC), reported at [2015] STC 307, reversed the First-tier Tribunal and held that the scheme was an abuse of rights.
3. First-tier Tribunal: in [2013] UKFTT 429 (TC), reported at [2014] SFTD 78, held that the scheme was not an abuse. The decision continued an earlier hearing which had resulted in decision 17854 (MAN/00/2630).