On appeal from: [2013] EWCA Civ 868

The Supreme Court unanimously allowed the appeal concerning the application of the European law principle of abuse of rights in the context of VAT.

The respondent, the largest car sales group in Europe, used a scheme devised by KPMG to reduce its VAT liability on 2 occasions in late 2000 and early 2001. The KPMG scheme exploited three exceptions to the normal incidence of VAT so that Pendragon would only have to account for VAT in respect of the difference between the wholesale purchase price and the retail sale price of its demonstrator cars. It is common ground the scheme technically worked and satisfied the conditions for exemption from VAT and the application of the margin scheme. However, as VAT is an EU tax, the appellant’s argued that the scheme was abusive and that the respondent should have to pay back the VAT avoided. The FTT dismissed the appeal but this was overturned by the UT on appeal. The Court of Appeal agreed with the FTT and ruled that the scheme was not abusive and so the Supreme Court had to decide if the Court of Appeal was correct to reinstate the FTT ruling.

Lord Sumption stated that in establishing whether the scheme was abusive it must first be shown that the transactions concerned resulted in a tax advantage which would be contrary to the purpose of the conditions laid down in the relevant EU Directive. He reasoned that the direct purpose of the margin scheme is to grant relief to traders who have acquired goods from a supplier who had no right to deduct input tax in respect of their own acquisition of them. The indirect purpose of the margin scheme is thereby to avoid double taxation. However, in the present case, a system designed to prevent double taxation has been exploited so as to prevent any taxation at all.

Secondly it must be objectively apparent that the essential aim of the transaction was to obtain a tax advantage. Even if a transaction has a legitimate commercial purpose, it is open to challenge if the accrual of a tax advantage constitutes its principal aim. Sumption reasoned that it was not in itself objectionable that the respondent chose to enter into a transaction with an offshore bank. However, it was essential to the scheme that Captive Co 5 acquire the cars as part of a business as a going concern, and for that to be possible, it was essential that the transferor of the business have acquired the cars by assignment. These steps were included for the sole purpose of reducing VAT liability.


For judgment, please download: [2015] UKSC 37
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