The Commissioners for HMRC v Newey (t/a Ocean Finance)

Tax motivation alone does not establish an abuse of EU VAT law. The court must ask whether applying the relevant provisions produces a tax advantage contrary to their purpose and whether objective factors show that obtaining the advantage was the essential aim. A trader may choose a tax-efficient structure, including a genuine business carried on through a foreign company or services sourced outside the EU. That choice remains lawful if properly implemented and consistent with economic and commercial reality. The court must evaluate the actual business relationships, the method used to achieve any commercial purpose, and the scheme both in its component transactions and as a whole. On a tribunal appeal, a material error of law requires proper reconsideration rather than a bare inquiry into whether the original conclusion was open to the tribunal.

HMRC assessed Mr Newey to VAT on advertising services supplied by a Jersey company to Alabaster, the Jersey company said to operate the Ocean Finance loan-broking business. The First-tier Tribunal allowed his appeal, finding that Alabaster supplied the loan-broking services and received the advertising services, and that there was no abuse of law.

Following a reference to the CJEU, the Upper Tribunal dismissed HMRC’s appeal in [2015] UKUT 300 (TCC). HMRC appealed to the Court of Appeal on four grounds concerning abuse of law, artificiality, exempt supplies and the territorial purpose of the VAT regime. The central issues were whether the tribunals had erred in law and whether the case should be remade or remitted.

1. Appeal allowed. The decision of the Upper Tribunal was set aside and the case was remitted to the First-tier Tribunal.
2. Appellate jurisdiction. Appeals from the First-tier Tribunal to the Upper Tribunal and from the Upper Tribunal to the Court of Appeal lie only on questions of law under the Tribunals, Courts and Enforcement Act 2007. A material error is normally one which might have affected the result. Once the Upper Tribunal identifies such an error, it must exercise its statutory powers to set aside and, where appropriate, remake the decision. The Court of Appeal must examine the Upper Tribunal’s reasoning in its own terms, rather than merely asking whether the First-tier Tribunal’s conclusion was open to it. This followed the guidance in Pendragon Plc and others v Revenue and Customs Commissioners [2015] UKSC 37.
3. VAT characterisation and abuse. Contractual terms are the starting point for identifying the supplier and recipient of a supply, but they are not conclusive. The analysis is objective and must reflect economic and commercial reality. The Halifax tests require both a tax advantage contrary to the purpose of the relevant VAT provisions and an objectively established essential aim of obtaining that advantage. Taxpayers may structure their businesses to limit tax liability. Incorporation abroad or sourcing services outside the EU is not itself abusive, provided the structure is genuinely implemented and reflects commercial substance.
4. Required evaluation. The abuse inquiry must examine the business relationships actually entered into and the method by which any commercial purpose was achieved. It may consider individual transactions and the scheme as a whole. The court identified questions concerning control of Alabaster, the independence of its directors, the processing work performed in the United Kingdom, and the relationship between the advertising companies. The court considered that wholly artificial arrangements were a paradigm example, but did not need finally to decide whether total artificiality was invariably required.
5. Errors below and remittal. The First-tier Tribunal had materially lost sight of the agreed fact that Alabaster made exempt supplies in the United Kingdom and had not conducted the overall evaluation required by the CJEU guidance. The Upper Tribunal misread that reasoning and wrongly treated the errors as immaterial. The Court of Appeal was not equipped to make the necessary factual evaluation itself. The First-tier Tribunal was directed to reconsider its evaluative findings and conclusions, with discretion over further evidence and procedure.

• Court of Appeal (Civil Division) allowed HMRC’s appeal, set aside the Upper Tribunal’s decision and remitted the case to the First-tier Tribunal.
• Upper Tribunal (Tax and Chancery Chamber) dismissed HMRC’s appeal from the First-tier Tribunal in [2015] UKUT 300 (TCC).
• First-tier Tribunal allowed Mr Newey’s appeal against the VAT assessment.