The opinion of an Advocate-General of the European Court of Justice concerning the use of an asset leasing structure to defer the payment of tax has produced a mixed result for the taxpayer.
The litigation has generated much interest with taxpayers and member states because it deals with the issue of abusive practice.
In the UK case, The Commissioners for Her Majesty's Revenue & Customs v Weald Leasing Limited (C-103/09), Ján Mazák, the Advocate-General, was of the view that structuring that meant assets were leased instead of bought to spread the payment of irrecoverable VAT does not give rise to a tax advantage that breaches EU VAT law, confirming the view of the UK courts.
The Advocate-General added, however, that the use of a purely artificial structure that prevented tax authorities from assessing whether leasing arrangements took place at their open market value was an abusive practice.
The case covers the use by group companies of Churchill, an insurance provider, of Weald Leasing, another subsidiary of the group, to buy assets and equipment which it leased back to the group companies through Suas, another entity, that was associated with, but was not part of Churchill.
The group companies used this structure they had an input VAT recovery rate of only 1% when buying assets and equipment themselves. They became liable for the rent paid for leasing the assets not for the amount they cost. The leasing structure they used allowed them to spread the payment of non-deductible VAT and defer the group's VAT charge.
The VAT and Duties Tribunal in the UK ruled in 2007 that the purpose of the transactions was to obtain a tax advantage but it could see nothing in EU law that did not allow the taxpayer to do this.
The tribunal added that abuse could only be connected to the amount of rent charged and whether the arrangement prevented the tax authorities from making an assessment that the the transactions took place at their open market value.
The tax authorities appealed the decision to the High Court in London, but lost on the question of whether the tax advantage breached the provisions of the Sixth EU VAT Directive.
The Court of Appeal referred four questions in the case to the ECJ, covering whether the tax advantage obtained was in breach of the directive, if it was abusive to use in leasing transactions an exempt or partly exempt trader that usually does not get involved in these arrangements, what the relevance of "normal commercial operations", a term used in Halifax, another ECJ decision on similar issues, was and how the leasing structure should be re-defined if it was found to be abusive.
The AG noted in his opinion, which came out on Tuesday, that in Halifax (C-255/02) the ECJ had "enunciated a broad principle that transactions which are not carried out in the context of normal commercial operations will be considered abusive where their purpose is to wrongfully obtain an advantage provided for by EU law" and that that '[t]o allow taxable persons to deduct all input VAT even though, in the context of their normal commercial operations, no transactions conforming with the deduction rules of the Sixth Directive or of the national legislation transposing it would have enabled them to deduct such VAT, or would have allowed them to deduct only a part, would be contrary to the principle of fiscal neutrality and, therefore, contrary to the purpose of those rules'.
In the AG's opinion, "normal commercial operations" referred to the nature of the transaction or scheme in question, not to the operations that the taxpayer usually carries out.
On the final question, the AG said if an abusive practice was established, the transactions can be re-defined to produce what would have occurred without the use of the abusive transactions.
"It is encouraging," said a leading VAT barrister in London. "The conclusions are rather truncated, so you need to read paragraphs 27 and 28 carefully." They refer to the re-definition of the transactions.
"They [Paragraphs 27 and 28] say to me that only the interposition of Suas establishes the abusive practice," the barrister added.
Barristers Michael Conlon, QC, of Temple Tax Chambers and Nicola Shaw of Gray's Inn Tax Chambers, and McGrigors, the law firm, represented the taxpayer.
The ECJ verdict often follows the opinion of the Advocate-General, though the judges are not compelled to. Some practitioners speculate that the decision could be out before the end of 2010 as the opinion was due on November 18 and came out about three weeks before that.
The Court of Appeal in London asked the ECJ for a preliminary ruling so the case will return there for final disposal after the European Court has given its verdict.
