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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
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Lord Osborne
Lord Clarke
Lady Dorrian
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[2006] CSIH 10
XA57/05
OPINION OF THE COURT
delivered by LORD OSBORNE
in
APPEAL TO THE COURT OF
SESSION
under section 11 of the
Tribunal and Inquiries Act 1992
by
HER MAJESTY'S
COMMISSIONERS FOR REVENUE AND CUSTOMS
Appellants;
against
RBS DEUTSCHLAND HOLDINGS GmbH
Respondents:
_______
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Act: Currie, Q,C., Ghosh; Shepherd & Wedderburn (Appellants)
Alt: Tyre, Q.C.;
MacRoberts (Respondents)
13 January 2006
The background circumstances
[1] The
respondents carry on business providing banking and leasing services from
premises in Frankfurt am Main in the Federal Republic of Germany. They are registered for the purposes of United
Kingdom value added tax as a
non-established taxable person under registration number 674 3878 86. They are a wholly owned subsidiary of the
Royal Bank of Scotland Group of Companies.
[2] The
respondents purchase assets, more particularly new motor cars, from United
Kingdom suppliers. These are subsequently leased to United
Kingdom customers for a prime period of no
more than two years and are used for business and private purposes by employees
of the United Kingdom
customers. The respondents reclaim input
tax on the purchase of the assets, but do not pay output tax in either the United
Kingdom or Germany on the
supplies made by way of lease agreement, asserting that the supplies are
outside the scope of both the United
Kingdom and German value added tax
legislation. A lease of a motor car may
be treated either as a supply of goods or of services. Normally such a lease is treated as a supply
of services, but it will be treated as a supply of goods if ownership of the
asset passes on the date of the final instalment payable. To the extent that such leases are treated as
supplies of goods, they are subject to value added tax in the State where the
goods are located when supplied. To the
extent that such leases are treated as a supply of services, they are taxed in
the State where the lessor has established his business. All Member States of the European Union ought
to establish and interpret rules relating to the characterisation of such leases,
so that they are treated in an identical manner. In practice, differences exist.
[3] It
was stated to us on behalf of the appellants that the respondents had developed
a form of lease which, under the relevant German rules, was treated as
involving the supply of goods, but, under United Kingdom rules, was
to be treated as a supply of services.
The practical consequence of these characterisations was that no value
added tax was payable in either country on the supply during the currency of
the lease. The leases were for periods
of less than two years. During the
currency of the leases, the motor cars concerned remained in the United
Kingdom and, at the end of the period of
the leases, were sold there, when output tax on sale was paid and rendered. In pursuance of these arrangements, the
respondents claimed credit for input tax on the purchase of the motor cars, but
made no charge to output tax when leasing them to a United
Kingdom customer.
[4] Following
a course of correspondence between the appellants and the respondents, the
appellants notified the respondents in a letter dated 22 August 2003 of their
contentions that:
(1) The
respondents were not entitled to claim credit for input tax on the vehicles
purchased
as they could not be said to have been purchased with the intention of using
them for the purposes of a business carried on by the respondents, as the
vehicles were not being used for a transaction on which value added tax was to
be charged. (The preferred analysis).
(2) In
the alternative, the onward supplies made by the respondents should attract
value added
tax in accordance with the reverse charge mechanism under section 8(1) and
paragraph 9, Schedule 5 of the Value Added Tax Act 1994. As a consequence, the respondents would be
entitled to claim credit for input tax incurred on the purchase of the
vehicles, but the customer would be liable to account for output tax on the
supplies made under the lease agreements.
(The first alternative analysis).
(3) In
the further alternative, the respondents and their customers had artificially
created
conditions in order to obtain a tax advantage against the spirit and purpose of
the value added tax legislation, amounting to an abuse of rights. Accordingly, the respondents should be denied
input tax recovery on the purchase of the vehicles. (The second alternative analysis).
[5] As
a consequence of the preferred analysis, the appellants assessed the
respondents to the sum of £205,001, being input tax claimed by the respondents
in the months of March, July, August, October and December 2001. The assessments were duly notified to the
respondents by notice of assessments dated 22 August 2003.
The appellants also declined to repay a sum of £109,053.17, being input
tax claimed by the respondents for the months of May and June 2002.
[6] By
a letter dated 16
February 2004, the respondents' representative contested the
appellants' assessment of the transactions and contended that the respondents'
treatment of the lease agreement was in accordance with both United
Kingdom and German legislation. It did not amount to an abuse of rights and,
even if such a concept were applicable to taxation matters, the appellants'
interpretation and application of paragraph 9 (Schedule 5) was incorrect. By a letter dated 23 June 2004, the
appellants responded to the points made by the respondents' representative and
upheld the earlier alternative decisions and, in particular, the decision to
recover by assessment and to refuse the respondents' input tax claim in the
total sum of £314,056.24.
[7] By
a notice of appeal dated 9 July
2004, the respondents appealed against the assessment for input
tax recovered totalling £205,001 in periods between 1 March and 31 December 2001 and the
refusal of the appellants to meet claims for input tax totalling £109,053.17 in
the periods 1 May to 30 June
2002. That appeal
currently stands undetermined before the Value Added Tax and Duties Tribunal in
Edinburgh (hereafter
referred to as "the Tribunal").
[8] By
an application for directions and a notice of application for disclosure of
documents, as amended, dated 22 March 2005, the appellants applied to the
Tribunal for a direction that the second alternative analysis, relating to the
European Union principle of abuse of right should be stayed, pending the
decision of the European Court of Justice in joined cases Halifax plc, BUPA Hospitals
Limited and Huddersfield University (Case-255/02), with liberty to the
appellants to make a further application to the Tribunal in relation to the
disclosure of any evidence not already disclosed to them which might be
determined by the European Court of Justice as relevant to the application of
the principle of the abuse of right.
Further, the appellants applied for an order of the Tribunal, by way of
amendment to their application to the Tribunal dated 17 January 2005, that the
respondents, within 30 days of the application should supply to the appellants
a list of specified documents, which were said to be in the possession, custody
or power of the respondents, together with copies of all such documents which
were not subject to a claim for legal privilege pursuant to Rule 20(3) of the
Value Added Tax Tribunal Rules 1986. The
application went on to specify a wide range of documents relating to the
leasing arrangements described, and associated matters. These applications came before the Tribunal
for hearing on 26 April
2005. The decision of the
Tribunal, against which the present appeal has been taken, was dated 3 May and
was communicated to the parties on 5 May 2005. The Tribunal
decided to decline to sist any part of the appeal to the Tribunal and further
refused to make an order in relation to the production of further documents.
[9] The
reasoning of the Tribunal included the following paragraphs:
"The
non-preferred contention for HM Revenue and Customs was that the appellants
(the present respondents) were not entitled to claim the recovery of the input
tax in question because there had been what they called an abuse of rights.
Assuming,
but without deciding and without expressing any opinion on the soundness of the
argument that the way in which transactions are structured as opposed to their
genuineness or reality could ground a contention based upon a theory of abuse
of rights the matter for the Tribunal at this stage was whether that part of
the appeal be sisted pending the outcome of the proceedings before the ECJ in Halifax and Others.
By the
stage this matter reached the Tribunal the Advocate General had delivered an
opinion in that case on 7 April
2005. Again without
affirming that his opinion would necessarily be followed it contains strong
indications that a key question is whether there was an economic justification
for the activity under scrutiny other than that of a tax advantage (para.
87). Further the Advocate General said,
(para. 89) the prohibition of abuse as a principle of interpretation is no
longer relevant where the economic activity carried out may have some
explanation other than the mere attainment of tax advantages against tax
authorities. Earlier in his opinion the Advocate
General said, (para. 84) there is no legal obligation to run a business in such
a way as to maximise tax revenue for the State.
The basic principle was that of freedom to opt for the least taxed route
to conduct business in order to minimise costs.
In para. 56 the observation was made that there was in principle no
single normal way to conduct an economic activity. There is nothing abnormal in itself, for
example, in a banking company making use of interposed investment and
development companies to carry on construction services instead of contracting
directly with construction companies.
In the
light of those observations, none of which are in the smallest way startling,
the attempt in the present case to create an argument on abuse of rights in
respect of transactions on their face for the purchase, lease and sale of goods
which actually exist, facts conceded by the respondent (the present appellant)
in paragraph 2 of the statement of case, might appear to have a slender
foundation. On that basis alone there is
little justification for sisting part of the appeal.
Matters
however do not end there. This Tribunal
would only sist proceedings against the wish of one of the parties pending a
decision in another court where that decision would be determinative of the
issues before the Tribunal. That does
not appear clearly to be the case.
Moreover
the question for the Tribunal on that aspect of the case appears to be whether
HM Revenue and Customs have put forward a prima
facie case that the transactions were in themselves artificial as opposed
to being construed in a different and economically effective way. They have not. One suggestion made was that because a lease
was for two years was unusual (so ran the argument) that could show an abuse of
right. I found that proposition
startling.
There is in
the view of the Tribunal no reason why there should be any further delay for
the appellant on this matter. If on the
facts available and apparent in the correspondence already produced the
transactions require to be accepted as genuine no question of abuse of rights
could ever arise. If the transactions
were not genuine HM Revenue and Customs would require to establish that, but
there is no indication that they have even applied their minds to anything other
than the legal issue which they set out in their 'preferred analysis'.
Indeed it
is difficult to see in relation to the underlying facts of the entire appeal
that there can be any substantial dispute on the facts as opposed to law. The case and the arguments upon it can be
presented to the Tribunal without any consideration of Halifax. If HM Revenue and Customs' first contention
is correct no question of abuse of rights arises."
The Tribunal, in its decision, then
proceeded to deal in detail with the request for disclosure and production of
documents. It is unnecessary in the
present context to consider that part of the decision in detail.
Submissions for the appellants
[10] When the appeal came before us, senior counsel for the
appellants began by outlining the background circumstances, which we have
narrated. He then drew our attention to
what he said was the relevant European jurisprudence. The first of the cases to which he referred
was Emsland-Stärke GmbH v Hauptzollamt Hamburg-Jonas (Case C-110/99). In particular he drew attention to paragraphs
[52], [53] and [59] of the judgment of the court. He submitted that it was evident from this
case that a finding of an abuse required, first, a combination of objective
circumstances in which, despite formal observance of the conditions laid down
by the Community rules, the purpose of those rules had not been achieved. It also required a second subjective element
consisting in the intention to obtain an advantage from the Community rules by
creating artificially the conditions laid down for obtaining it. It was plain from what was said in the case
that the intention of the taxpayer was also thought to be relevant. He went on to explain that the documents
sought to be recovered had been selected by reference to what was said in the
paragraphs mentioned in this case.
[11] Senior counsel for the appellants next referred to Halifax plc and Others, BUPA Hospitals
Limited and Another, and University
of Huddersfield Higher Education Corporation v Commissioners of Customs and Excise (Cases C-255/02;
C-419/02; and C-223/03). He pointed out that these three joined cases
involved transactions entered into for the purpose of gaining a tax advantage
in terms of a right to deduct input value added tax. In essence, the principal issues in those
cases were as follows: (1) could
transactions carried out with the sole purpose of enabling input tax to be
recovered constitute an "economic activity" within the meaning of Article 4(2)
of the Sixth Directive; (2) could the
doctrine of "abuse of rights" be applied in the field of value added tax as a
result of which claims to deduct value added tax incurred by a person in
circumstances such as those of the present cases might be disallowed. The procedural position was that Halifax plc and Others challenged the
Commissioners' refusals for repayment of value added tax on inputs before the
Value Added Tax and Duties Tribunal, London, which
dismissed the appeals. The Halifax applicants then appealed to the
High Court of Justice in England and Wales (Chancery Division) which quashed
the judgment and remitted it back to the Tribunal with a direction to
determine, among other issues, whether the sole purpose of the associated
applicants, in entering into the transactions at issue was value added tax
avoidance. That question had been
answered in the affirmative by that Tribunal, which, in addition referred
certain questions to the European Court of Justice. Among the questions referred was the
question:
"Does the
doctrine of abuse of rights as developed by the Court operate to disallow the
appellants their claims for recovery of or relief for input tax arising from
the implementation of the relevant transactions?"
The High Court (Chancery Division)
also decided to refer certain questions to the European Court of Justice. Among those questions were the following
questions:
"(a) is there a principle of abuse of rights
and/or abuse of the law which (independently of the interpretation given to the
Directive) is capable of precluding the right to deduct input tax? (b) if
so, in what circumstances would it apply?
(c) would it apply in
circumstances such as those found by the Tribunal?"
[12] The Advocate General delivered his opinion in the cases on 7 April 2005. The European Court of Justice itself had not
yet pronounced upon the questions referred to it. Senior counsel drew our attention to the
Advocate General's observations in paragraphs [60] to [64], [66] to [71], [73],
[83] to [85], [87] and [89]. In these
paragraphs the Advocate General entered upon a detailed consideration of the
doctrine of abuse of rights in European Union law and set out the approach
which he recommended that the European Court of Justice should take.
[13] Against this background, senior counsel submitted that the
Tribunal ought to have granted the sist.
In refusing to do so, it had committed certain errors of law. He made it plain that, if this court was of
the view that a sist ought to be granted, that would mean that the application
in relation to the recovery of documents did not require to be dealt with at
this time. Depending on the outcome of
the deliberations of the European Court of Justice in the case just mentioned,
the recovery might, or might not, be necessary.
Thus, the prior question was the matter of the sist. The concern of the appellants was that they
were being forced to enter the full Tribunal appeal hearing in a situation in
which European law in relation to abuse of right remained to be clarified by
the European Court of Justice.
[14] Senior counsel next proceeded to consider the decision of the
Tribunal, so far as it related to the application for a sist, in detail. He submitted that it was evident from that
decision that the Tribunal had misunderstood European case law. It had begun by assuming that there existed a
doctrine of abuse of rights which might be applicable in the circumstances of
the present case, although it was evident in that part of the decision that the
nature of that doctrine had been misunderstood.
However, at a later stage in the reasoning of the Tribunal, it had come
to express the view that there was a "slender foundation" for a case based on
that doctrine in the circumstances of the appeal. The Tribunal had gone on to conclude that the
appellants had failed to advance a prima
facie case in relation to the abuse of rights. The Tribunal appeared to consider that these
issues could be decided without any reference to the forthcoming decision of
the European Court of Justice in the case of Halifax plc. In short, the
Tribunal appeared to have decided the merits of the abuse of rights case
without proper and full argument and in a situation where the European law on
the matter required clarification, which would be forthcoming.
[15] In addition, the Tribunal had erroneously fettered its own
discretion in relation to a sist by saying that it would only sist proceedings
against the wish of one of the parties pending a decision in another court
where that decision would be determinative of the issues before the Tribunal. It was submitted that there was no
justification for such a narrow view being taken of the Tribunal's
discretion. At this point in his
submissions, senior counsel indicated that he had completed all that he had to
say on the issue of the appeal against the refusal by the Tribunal to sist the
proceedings in part. He indicated that,
if this court were able to form a view on that aspect of this appeal, it would
not be necessary for him to proceed to deal in detail with the application for
recovery of documents. In these
circumstances, we decided that it would be appropriate to hear the submissions
of the respondents on the issue of the appeal so far as it related to a sist of
the appeal in part.
Submissions of the respondents
[16] Senior counsel for the respondents indicated that, first, he
would make certain comments on the background circumstances of the case; secondly, he would comment upon the state of
European Union law in relation to abuse of rights, with a view to showing that
there was no prima facie case of such
abuse. However, answering questions by
the court, he agreed that the Tribunal had the power to strike out grounds of
appeal that were without any merit; it
had not done that in this case and had not been asked to do so. In that connection he referred to Rule 19(3)
of the Value Added Tax Tribunals Rules 1986, as amended. He accepted that the Tribunal here had acted
in a very robust fashion in relation to the application for a partial sist. The High Court in England had
proceeded in a far more circumspect manner by making the referrals mentioned to
the European Court of Justice. Senior
counsel accepted that the European Court of Justice judgment in the Halifax case could
not be regarded as irrelevant to the present case. However, the question was whether the
Tribunal had erred in law in the exercise of its discretion. The position of the respondents was that it
had not. The respondents were most anxious
to have the issues raised in the main appeal resolved, since they contended
that they were entitled to payment of a substantial sum of money representing
input tax.
[17] Looking at the whole circumstances of the case, it had to be
appreciated that all of the cars involved in the transactions in controversy
had now been sold, with output tax having been charged on sale and rendered to
the appellants. That circumstance
pointed to the conclusion that what was involved here were ordinary commercial
transactions involving no artificiality.
It was accepted that there was a mismatch as regards the relevant law of
the United Kingdom and Germany. However, that was a state of affairs from
which the respondents were entitled to derive advantage, if that were feasible
and lawful. In this connection reference
was made to the letter to the appellants, dated 30 August 2002 from Mr. D.J. Waghorn. Part of the background was that the
Commission of the European Union had not taken steps to cause the Federal
Republic of Germany to alter its value added tax laws in any respect.
[18] Turning to the European law, the cases of Emsland-Stärke GmbH v
Hauptzollamt Hamburg-Jonas and Halifax
plc v The Commissioners of Excise and
Customs had already been examined in detail. In paragraph 83 of the latter case a warning
was given as to the dangers of transposing criteria for abuse of rights from
one area of law to another. That was
relevant to the present case. Senior
counsel also relied on paragraphs 85 and 89 of that case. He went on to rely on Gemeente Leusden and Holin Groep BVcs v Staatssecretairs van Financien (Joined Cases C-487/01 and
C-7/02). In paragraphs 78 and 79 of that
decision it was stated that a taxpayer could not be censured for taking
advantage of a provision or a lacuna in legislation which, without constituting
an abuse, had allowed him to pay less tax.
[19] On the whole matter, it was submitted that the Tribunal had not
erred in law in expressing the views it did about whether a case based on abuse
of right had been made out. Had a sist
of that part of the case been granted, it would merely have allowed the
Tribunal to see whether, in the future, European law in this regard would
change. Finally, senior counsel
indicated that he did not seek to defend the statement by the Tribunal at page
8 of its decision as to the circumstances in which there would be a sist of
proceedings against the wish of one of the parties.
[20] Following the conclusion of these submissions, both counsel
agreed that, if the court was of the view that the Tribunal had erred in law in
relation to its refusal to grant a sist of part of the case, then this court
should itself deal with the matter of the sist.
The decision
[21] At page 6 of the decision of the Tribunal, it observed that
"Assuming,
but without deciding and without expressing any opinion on the soundness of the
argument that the way in which transactions are structured as opposed to their
genuineness or reality could ground a contention based upon a theory of abuse
of rights the matter for the Tribunal at this stage was whether that part of
the appeal be sisted pending the outcome of the proceedings before the ECJ in Halifax and Others."
It appears to us that the adoption
of that position was proper in the context of consideration of a motion for a
partial sist of proceedings. However,
unfortunately, the Tribunal did not adhere to that position. It drew attention to the fact that the
Advocate General had delivered an opinion in that case on 7 April 2005. Having done that, the Tribunal then went on
to adopt an approach to the case before it, based upon the Advocate General's
opinion, even though it recognised that that opinion would not necessarily be
followed by the European Court of Justice.
Having proceeded in that way, at page 7 of the decision, the Tribunal expressed
the view that the appellants' attempt to present a case based on abuse of
rights seemed to it to have a slender foundation. That position is elaborated on page 8 of the
decision where the Tribunal concludes that the appellants had not put forward a
prima facie case of abuse of rights, presumably
based upon the opinion of the Advocate General.
Later on the same page the Tribunal expresses the opinion that, in the
circumstances it considered existed, no question of abuse of rights could ever
arise. In our opinion, what the Tribunal
did, following the hearing on an application for a partial sist of the
proceedings, was, in effect, to reach a firm conclusion about the abuse of
rights element in the appellants' case, without holding a full hearing on that
matter. The Tribunal, in our opinion,
has simply prejudged that issue on an unsound basis. Furthermore, it did so in a context in which
the Chancery Division of the High Court of Justice in London had considered it
appropriate to make a referral to the European Court of Justice of certain
questions which are virtually identical to the questions which arise in this
case, that is to say, concerning the applicability of the doctrine of abuse of
rights to value added tax legislation and where the referral process has not
been completed by the European Court of Justice answering those questions, the
answers to which, as counsel for the respondents conceded, must be relevant to
the determination of the issue of abuse of rights in this case. In short, we consider that the Tribunal
misdirected itself in law in relation to its decision not to allow a partial
sist by proceeding upon a view of the law which cannot be regarded as
affirmed. Until the European Court of
Justice pronounces on this matter, we have difficulty in understanding how the
Tribunal could have proceeded in that way.
[22] Furthermore, at page 8 of the decision, the Tribunal made a
pronouncement to the effect that it would sist proceedings against the wish of
one of the parties pending a decision in another court only where that decision
would be determinative of the issues before the Tribunal. We do not recognise that proposition as one
reflecting normal practice in relation to the exercise of a discretion to sist. As we would see it, a Tribunal or court might
sist proceedings against the wish of a party if it considered that a decision
in another court would be of material assistance in resolving the issues before
the Tribunal or court in question and that it was expedient to do so.
[23] In all these circumstances we have reached the conclusion that
the Tribunal has erred in law and we shall quash its decision in relation to
its refusal to grant a partial sist of proceedings. It was a matter of agreement before us that
we should ourselves make a decision on that matter, rather than remitting the
issue to the Tribunal. Accordingly, we
shall now grant a sist of proceedings to the extent sought by the
appellants. Having announced this
decision to the parties, senior counsel for the appellants indicated that he
would drop his motion for disclosure of documents in hoc statu. He would be
free to make a new application in that regard in the future, if that appeared
to be appropriate following the promulgation of the decision of the European
Court of Justice in Halifax plc. Finally, there was no dispute before us that
this case should now be remitted to a differently constituted Tribunal to deal
with the aspects of the main appeal that have not been sisted. We consider that course appropriate, in view
of the very firm views expressed by the Tribunal as originally constituted on
the matter that has been sisted. No
doubt in due course that matter may come once again before the Tribunal, in one
way or another, and we think it appropriate that that should be dealt with by
the same Tribunal as deals with those aspects of the case which will now
proceed.
