[2010] UKFTT 183

TC00487

Appeal number LON/2005/0950

VAT – scheme to avoid irrecoverable input tax on supplies of advertising services to loan broking business – establishment of loan broking business in Jersey with processing services provided by UK business – whether advertising services supplied to UK business – whether UK business made supplies of loan broking services – whether scheme an abuse

FIRST-TIER TRIBUNAL

TAX 

	PAUL NEWEY T/A OCEAN FINANCE	Appellant

	- and -
	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

				TRIBUNAL: 	JUDGE ROGER BERNER
						MRS JOANNA NEILL (Member)

Sitting in public in London on 8 – 12 February 2010

Julian Ghosh QC and Elizabeth Wilson, instructed by Ashurst LLP, for the Appellant

Christopher Vajda QC and Owain Thomas, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	Paul Newey, trading as Ocean Finance, (“the Appellant”) appeals against an assessment to value added tax (“VAT”) for the period 1 July 2002 to 31 December 2004 in the sum of £10,707,075.  There is a dispute on the amount of the assessment, which we were not asked to determine.  Our decision is therefore one of principle only at this stage.
2.	The appeal concerns the VAT treatment of advertising services provided to a company, wholly-owned by the Appellant, Alabaster (CI) Limited (“Alabaster”), which is incorporated and tax resident in Jersey and with a place of belonging in Jersey, under a contract between Alabaster and a third party Jersey company, Wallace Barnaby & Associates Limited (“Wallace Barnaby”), and loan broking services made under a contract between Alabaster and various third party lenders in the UK.
3.	There are two issues for us to determine.  The first, put shortly, is that the Appellant says that the advertising services, targeted at UK customers seeking loans, were provided to Alabaster and that Alabaster provided the loan broking services.  HMRC say that the position under VAT law is that it is the Appellant, and not Alabaster, that supplies the loan broking services and that it therefore follows that the advertising services were supplied to the Appellant not Alabaster.  If HMRC are right, they say that a reverse charge arises on the Appellant under s 8(1) of the Value Added Tax Act 1994 (“VATA”), which would be attributable to an exempt supply of loan broking services in the UK, and thus not recoverable as input tax.
4.	If, contrary to HMRC’s first submission, the supplies of advertising services were made to Alabaster and not to the Appellant, then the second issue is that they say that the scheme, viewed as a whole, constituted an abuse of EC Directive 77/388/EEC (“the Sixth Directive”), and that the abusive advantage can be eliminated by treating the Appellant as receiving supplies of advertising services and using those services to make exempt supplies of loan brokerage services in the UK.
5.	The Appellant was represented by Julian Ghosh QC and Elizabeth Wilson.  Christopher Vajda and Owain Thomas appeared for HMRC.
The facts
6.	We were provided with a very short agreed statement of facts, which we do not reproduce here, as we can include the agreed facts within our overall factual findings.  We had witness statements of, and heard oral evidence from, the Appellant, Mr Newey, and from Dermot Boylan, a director of Alabaster since 8 December 2000, who is a partner in Moore Stephens, Jersey.  We also received in evidence bundles of agreed documents.  From this we summarise below our findings of fact.
7.	Before doing so, however, we should refer to an objection raised by HMRC in respect of certain written comments submitted on behalf of the Appellant after the hearing.  At the hearing itself we agreed that Mr Ghosh would provide the Appellant’s submissions on evidence early in the week following the hearing.  Mr Vajda’s submissions on findings of fact were produced at the hearing itself, prior to Mr Ghosh’s final reply.  After the hearing a revised version of HMRC’s submissions was received by the Tribunal, principally marked up to include references to the transcript of the hearing, but also containing some additional submissions.  On the Thursday (18 February 2010) of the week following the hearing the Appellant’s note on evidence was received.  On the following day an updated version was sent to the Tribunal, including comments on behalf of the Appellant on the HMRC submissions on findings of fact.  HMRC object to those comments being considered by the Tribunal, and say that the Appellant had the opportunity to comment on HMRC’s factual case in reply on the final day of the hearing.
8.	We do not consider there is anything in HMRC’s submissions in this respect.  Having agreed that the Appellant would have the opportunity to submit a written note on the evidence after the hearing, it is inherent that such a note would include comments by the Appellant on the submissions made by HMRC.  It is true that the Appellant could have addressed those issues in reply at the close of the hearing, but, once it had been agreed that a written submission could be made afterwards, we can see no reason why that should not include elements of reply to the HMRC submissions.  Indeed, it would be surprising if it did not.  The Appellant has the final say, and we cannot discern any prejudice to HMRC.  The Tribunal has itself considered all the evidence and has made its findings of fact on the basis of that consideration.  
Background
9.	Although this appeal relates to the period from July 2002 to December 2004, we should set out the background which goes back somewhat further.  The Appellant, who had experience as an employee of loan broking, commenced trading in May 1991 as a master broker in partnership with one Martin Horton under the name Sapphire Broker Systems (“Sapphire”).  As a master broker the partnership processed and handled loans for other smaller brokers.  Sapphire were passed leads generated by those smaller brokers from their own advertising, but did not generate leads themselves by advertising in their own name.  Sapphire would process loans (we describe below what processing involves) on behalf of the referring brokers and broker deals with lenders on its own panel, that is to say lenders with which they had a commission agreement.  Once the application was approved a commission was paid to Sapphire by the lender, and a percentage of that commission was passed by Sapphire to the referring broker.
10.	In November 1991, the partnership decided to expand from master broking into broking loans for its own applicants.  From an initial newspaper advertising campaign the business expanded and the partnership traded as a loan broker under the name Ocean Finance.  The partnership therefore at this stage had a processing business for other brokers (Sapphire) and its own loan broking business (Ocean Finance).  In about the autumn of 1992 the partnership ceased the Sapphire business, apart from a brief period in 1995 when it resumed before again being wound down.
11.	Ocean Finance attained a significant market share within a relatively short period.  The partnership at that stage became aware that a number of their competitors were not suffering any VAT cost on their advertising spend.  On advice from the partnership’s accountants, Moore Stephens, it was therefore decided that the loan broking operation should be established in Jersey rather than in the UK, as this had a significant VAT advantage over an equivalent UK based business.  Moore Stephens advised on the structure and on the way the decision-making processes should be operated in order to achieve the VAT advantage.   The arrangements which we describe below were put in place to achieve this objective.  We find that the Appellant’s sole reason for implementing these arrangements was to avoid VAT.
Alabaster
12.	At first the partnership established a brokerage operation in Jersey through a company, Lichfield (CI) Limited (“Lichfield”) incorporated and tax resident there.  The partnership retained the processing of applications, providing that service to Lichfield as broker under a contract dated 1 March 1996.  Lichfield was granted the right to use the names “Ocean Finance” and Diamond Finance” in advertisements.  In January 1997 the Appellant bought out Mr Horton’s interest in the loan processing operation and from then he carried on that business as a sole trader.  This business operated from Lichfield, Staffordshire before relocating to Tamworth in April 2002.
13.	Later in 1997 Lichfield ceased trading as a loan broker.  The Appellant, with the assistance of Moore Stephens, both in the UK and in Jersey, established a new company, incorporated on 15 May 1997 and tax resident in Jersey, under the name of Alabaster (CI) Limited.  The entire issued share capital of Alabaster is, and has at all material times been, £2 comprising 2 ordinary shares of £1 each beneficially owned by the Appellant.  The Appellant also made loans to Alabaster totalling £880,375 during the initial accounting period to 30 September 1998.  These loans were in order to provide Alabaster with working capital, and were interest free and unsecured.  Of the total loans, an amount of £696,500 was repaid in that first financial period; the balance of £183,875 was repaid in the period to 30 September 1999.  In each case these repayments were financed out of Alabaster’s own cash flow from its business.
14.	Alabaster obtained in 1997, and held at all material times, a licence from the Office of Fair Trading licensing it under the Consumer Credit Act 1974 to carry on in its own name and in the names of Ocean Finance and (by virtue of a variation of the licence issued on 10 November 1997) Diamond Loans, the businesses of consumer credit, consumer brokerage, debt adjusting/counselling and debt collecting.
15.	On 2 October 1997 Alabaster and the Appellant entered into an agreement (“the  Services Agreement”) under which the Appellant agreed to provide loan processing services to Alabaster.  The Services Agreement is important, and we review it in more detail below.
16.	On the same date Alabaster entered into an agreement with First Island Properties Limited under which Alabaster was to be provided with, amongst other things, a private office with a floor area of not less than 50 square feet, a desk, chair, filing facilities, telephone/fax lines (through First Island’s switchboard) and a networked workstation with printer, the use of an unspecified room as required in which to hold directors’ meetings, access to common areas and toilet facilities.  The leased space was in a building also occupied by Moore Stephens.
17.	Alabaster’s directors, of whom there have at all material times been not less than four, were provided or recruited locally by Moore Stephens, Jersey.  The articles of association of Alabaster provide that, subject to statute and the memorandum and articles and to any direction given by special resolution, the business of the company shall be managed by the directors who may exercise all the powers of Alabaster.  There was no restriction on the powers of the directors in the memorandum or articles or in a special resolution.  Accordingly, the directors were responsible for managing and exercising the powers of Alabaster subject to any requirements imposed by the Companies (Jersey) Law, 1991.  The Appellant played no part in the management of Alabaster.  From incorporation of the company to his resignation on 20 February 2003, the principal director, in terms of the executive functions that he carried out, was Jeremy Hewlett.  (Mr Hewlett has since died, so we did not receive evidence from him.)  Mr Hewlett had been chief executive of Equity & Law Insurance Company in Isle of Man and Jersey, and was recently retired from employment when he took up his position with Alabaster.  Apart from Mr Hewlett and Mr Boylan, the other directors during the period relevant to this appeal were: Clive Barton (15 May 1997 to date), Jamie Le Sueur (15 May 1997 – 24 February 2003), Ray Bradshaw (1 July 2001 – 31 December 2004), James Bowman (15 May 1997 to date) and Ian Philpott (21 February 2003 – 31 December 2004).  Of these, as well as Mr Boylan, Mr Barton and Mr Bowman were also partners in Moore Stephens, Jersey.  All the directors were Jersey residents.  None of them had any direct experience of loan broking.  Those directors who were partners in Moore Stephens, Jersey charged for their services on a time basis.  For the other directors, the highest annual fee for each during the relevant time was: Mr Hewlett £6,800, Mr Bradshaw £10,400 and Mr Philpott £4,200.
18.	Also on 2 October 1997, there was an agreement between Alabaster and Moore Stephens, Jersey whereby a secondee was provided to the company to work for 25 hours per week.  The first such secondee, Olive Gardner, retired in 2001, and was replaced by Lucy Woodworth, who was contracted for 36¼ hours per week.  Lucy Woodworth generally worked from 10am to 5pm or so Monday to Friday.
19.	By a further agreement with Moore Stephens, Jersey dated 2 October 1997, Alabaster was provided with accountancy and related services, including the maintenance of corporate records, the preparation of accounts and the filing of certain statutory returns.
The Services Agreement
20.	We referred briefly above to this agreement, entered into on 2 October 1997 between Alabaster and the Appellant.  It recited that Alabaster had entered into agreements with various lenders to act as intermediary in arranging the granting of personal loans by the lenders, and that, having regard to the fact that Alabaster had no place of business in the UK and that the Appellant had the necessary expertise, credit licences, staff and facilities for the processing of applications for such loans, Alabaster wished to engage the Appellant for the provision of certain services in accordance with Alabaster’s instructions.  The operative part of the Services Agreement contains a list of services the Appellant was to provide which essentially covers all the processing tasks for the loan broking business, from the dealing with enquiries from prospective borrowers in response to advertisements placed by Alabaster to referring loan applications in accordance with Alabaster’s instructions.  Alabaster itself undertook certain obligations including ensuring compliance of advertisements with consumer credit legislation and the giving of written authority for the forwarding of documents to customers.  It also agreed to specify the name of a lender for each application, but it was accepted that in practice this had been done by the Appellant and not by Alabaster.
21.	Under the Services Agreement the Appellant agreed to allow Alabaster to use the name “Ocean Finance” in its advertisements for the sole purpose of soliciting applications from the public.  It was also provided that the form of those advertisements was subject to the approval of the Appellant from time to time.  There was no power under the Services Agreement for the Appellant to commission advertising for Alabaster.
22.	For his processing services the Appellant was paid a fee by Alabaster.  At the outset of the Services Agreement this fee was fixed at 50% of the commissions immediately receivable in respect of each loan by Alabaster, together with the payment of certain expenses or disbursements.  The Services Agreement provided that this fee was subject to review, and it was reviewed subsequently, in February 1998, so that the fee payable was increased from 50% of the commissions immediately receivable by Alabaster to 60% of those commissions.  This was confirmed by letter dated 2 February 1998 from Alabaster to the Appellant, signed by Mr Hewlett on behalf of Alabaster.  The background to this, we heard from Mr Newey, was that certain lenders were paying override commissions to Alabaster.  These were additional commissions for achieving a certain level of business, and were not immediately receivable in respect of individual loans and so were not included in the calculation of the Appellant’s fee under the Services Agreement.  The increase in the percentage share of the Appellant in the immediately receivable commissions was to compensate the Appellant for the fact that it would not receive a share of any override commissions.
23.	Separately from the Services Agreement itself, but related to fees so it is appropriate to refer to it here, in April and May 2001 it was agreed between the Appellant and Alabaster that the Appellant would introduce business from third party introducers to Alabaster.  These introductions would then be processed according to the Services Agreement.  In such a case, 50% of the commission would be ceded to the third party introducer, and 45% would be paid to the Appellant for the processing, leaving 5% for Alabaster.  We also heard evidence of broker commissions during the early period when the Appellant (in partnership with Mr Horton) operated as a master broker and typically ceded 50% to 60% of commission to a sub-broker.  This demonstrates to us that in an arm’s length transaction between a broker and processor, a processor might expect to receive a share of between 40% to 50% of the broker commission.  We do not consider, as was suggested by Mr Vajda in cross-examination of Mr Newey, that the 50% or 60% commission share of the Appellant under the Services Agreement shows that the activities of the Appellant were those of a broker, and not a processor; that is determined by the nature of the activities themselves.  But nor do we consider that these third party examples are, as submitted by Mr Ghosh, comparables that would lead us to find that the Services Agreement was an arm’s length arrangement.  In our judgement it was not.  In an arm’s length situation, the commission paid to an introducing broker reflects the initial business generated by that broker.  This is achieved, in the main, directly through advertising, but advertising alone does not generate the business.  That depends, in our view, based on the evidence, to a significant extent on goodwill and name recognition.  The Services Agreement provided for Alabaster to have the use of a valuable established trade name, “Ocean Finance” at no cost.  Viewing the agreement as a whole therefore, it cannot in our view be regarded as at arm’s length.
24.	The Services Agreement contained an indemnity in the following terms:
“Alabaster and Mr Newey agree … that they will indemnify the other against the consequences of breach by either of them of any Statute or subsidiary legislation or non-statutory Code of Practice applying to the loans or their advertising”
In addition the agreement provided that each of Alabaster and Mr Newey should maintain their credit-broking licences and apply for and maintain any other licence or authority necessarily incidental to their respective businesses and the services specified under the agreement.  Mr Vajda argued generally that the Appellant was not precluded by the Services Agreement from being held to have made supplies of loan broking services, and that these provisions in particular supported that proposition.  We agree that the agreement could not prevent a finding that the Appellant made loan broking supplies, but equally we consider that its terms are not indicative that such supplies were made by the Appellant.  We do not regard the requirement for the maintenance of a credit broking (as opposed to a more limited) licence by the Appellant as material; this merely recognised the status of the existing licence held by the Appellant and the fact that lenders would require not only a broker, but also a broker’s associates (including a processor) to maintain all necessary licences.  Nor did we construe the indemnity as anything more than a normal cross-indemnity.  Although it could have been drafted more clearly, we do not consider that it created potential liability for the Appellant beyond the Appellant’s own breaches.
25.	The Services Agreement was expressed to be non-exclusive, meaning that in theory either Alabaster or the Appellant could conduct business with third parties outside its terms.  In fact we heard that no such external business was undertaken.
26.	Mr Vajda argued that the Services Agreement was a tax-driven document that did not fully or accurately describe the true nature of the legal relationship between the parties, but he did not argue that the agreement was a sham.  He said that, whilst it provided for the provision of certain specified services, this was done in vague terms wholly lacking in commercially necessary detail as to the nature and level of service provision.  There were no set service levels, time limits, targets or key performance indicators.  We agree that the agreement lacked commercial detail that might be expected in an arm’s length contract between independent third parties, but any deficiencies in this respect can be attributed to the fact that this was not such an arrangement.  The Appellant was the sole beneficial owner of Alabaster, and any element of non-arm’s length dealing is, in our view, attributable to that fact, and does not indicate to us that the activities of the Appellant were anything other than those performed under and by virtue of the Services Agreement.
27.	We do not accept Mr Vajda’s description of the Services Agreement as a tax-driven document.  This was a more general theme, describing the agreements entered into by Alabaster with third party lenders and the advertising agency, and the decisions taken by Alabaster in the course of its operations, in similar terms.  We do not accept this description of Alabaster’s activities.  Although we have found that the original reason for deciding to set up the Jersey business was a tax reason, namely to avoid the irrecoverable VAT on advertising costs, that does not in our view result in all the activities of the business itself being for tax reasons.  If a certain course of action is decided upon for tax reasons, it follows of course that agreements and processes will be put in place to achieve that purpose.  In some cases a tax purpose may be achieved by agreements and transactions that are themselves wholly tax-motivated.  In other cases, however, for example where the tax purpose is achieved by carrying on business in a tax-efficient form, the individual components of that business operation will not aptly be described as themselves tax-driven.  If an individual, unincorporated, taxpayer decides to incorporate his business for tax reasons that does not mean that the company’s transactions will forever be tainted with that original tax purpose.  Similarly, if a business decides to establish all or part of its operations outside the UK, that may be attractive for tax reasons, and indeed the purpose may be to avoid UK tax, but it does not follow that the offshore business, its contracts and operations, must be regarded as themselves tax-driven.
28.	We find that, whilst not an arm’s length agreement, the Services Agreement did represent and reflect the real activities of the Appellant and Alabaster.  We describe below their respective activities.  We find that the processing operations and other services performed by the Appellant were all performed under the Services Agreement.  We further find that, whilst Alabaster did not itself have the infrastructure in Jersey to conduct a loan broking business, it equipped itself to conduct such a business by outsourcing the processing operation to the Appellant.  Given this, we do not consider that the fact that there were only limited resources in Jersey itself has any impact on the carrying on by Alabaster of the loan broking business.  Whilst we accept that certain information known to the Appellant in respect of Alabaster’s business, such as its profitability, and income and costs, might not be known to an arm’s length sub-contractor, it would be known to a 100% shareholder, and there is nothing in this fact that suggests that the contractual relationship between the Appellant and Alabaster was anything other than contractor and sub-contractor.
The lenders
29.	On the commencement of its business Alabaster wrote to a number of prospective lending organisations in order to be appointed to act as an intermediary in the arranging of loans (loan broking).  The lenders were those with which Lichfield had previously had a relationship, largely (if not wholly) those for whom Lichfield had previously brokered loans under the Ocean Finance name.  We were shown a number of examples of correspondence and agreements with such lenders.  Subsequently more lenders were added to Alabaster’s panel of lenders.  Potential new lenders would approach the Appellant in the first instance.  The contracts with the lenders were typically discussed between the lenders and the Appellant, and any negotiations on terms were conducted by the Appellant, but the final approval and signing rested with the directors of Alabaster.  The Appellant did not hold himself out as being able to bind Alabaster or acting as agent for Alabaster.  We find that the activities of the Appellant in this respect were undertaken under the Services Agreement, and not as loan broker in his own right.
30.	We heard evidence on the extent to which there was uniformity in lenders’ commission rates, and the extent to which commission rates were an element in competition between lenders for business.  We find that commission rates varied depending on the type of loan product offered, for example as between secured and unsecured loans, but within categories there was little variation.  Lenders sought to obtain a competitive edge by offering incentives, such as override commission on achieving certain targets.  Lenders paid commission directly to Alabaster either by sending a cheque made out to Alabaster to the Alabaster offices in Jersey or in many cases by crediting it directly to Alabaster’s bank account in Jersey.  If there were late payments of commissions, the Appellant would assist in seeking payment.  We find that this activity was also part of the services of the Appellant provided under the Services Agreement.
31.	We find that all loan broking was done pursuant to the agreements (whether written or oral, or established by conduct) between Alabaster and the lenders, and all payments of commission for the loan broking services were made by the lenders to Alabaster.  The Appellant did not have any contracts with lenders with respect to loan broking.
Advertising
32.	On 2 October 1997 Alabaster entered into an agreement with Abacus Advertising and Marketing (Jersey) Limited (“Abacus”), an advertising agency based in Jersey, with no place of establishment in the UK.  Abacus was familiar with the loan broking business having previously provided advertising services to the Appellant.  Abacus negotiated advertising space with UK advertising media and placed advertising in accordance with Alabaster’s instructions under the business name of Ocean Finance.
33.	Abacus entered into a contract with Ekay Advertising (“Ekay”), a UK-based agency which dealt directly with the UK media, negotiated pricing and made recommendations to Abacus as to which media outlets adverts should be placed with.  Ekay subsequently established a relationship with a more substantial Channel Islands based advertising agency, Wallace Barnaby & Associates Limited (“Wallace Barnaby”).  In order to maintain continuity of dealings with the UK media, in 2001 Alabaster switched its account to Wallace Barnaby, and entered into a contract with Wallace Barnaby on 26 November 2001.
34.	Successful advertising for potential borrowers was critical to the loan broking business.  The advertising spend was a considerable cost of the business; in the year to 31 December 2004, Alabaster’s spend on advertising reached in excess of £22 million.  This was key to the profitability of Alabaster, and indirectly, through its fee arrangement in respect of its services under the Services Agreement giving it a percentage of Alabaster’s commissions, that of the Appellant.  In the latter stages of its operations Alabaster was authorising and approving in excess of £400,000 of advertising spend per week.
35.	The Appellant had a relationship with one Eddy Powell of Ekay, and Mr Powell would discuss with the Appellant the content of the advertisements and the yields on particular adverts.  The Appellant monitored the advertising and would share his views with Mr Powell.  He would also inform Mr Powell of the levels of processing capacity available, and on the basis of all this information, which as a commercial matter would necessarily have had to have been obtained from the processing operation, Mr Powell would make a recommendation to Wallace Barnaby.  We find that the Appellant’s involvement in the advertising process was limited to this, and was consistent with the services performed under the Services Agreement, and the Appellant’s own interest (through having a right of approval of advertisements) in protecting his trade name and reputation.  We do not accept Mr Vajda’s submission that Mr Powell’s (or Ekay’s) client in terms of obtaining instructions was the Appellant.
36.	The process for the placing of advertisements on a weekly basis worked in the following way.  Each week, on a Friday, Alabaster directors would meet to discuss the potential weekly advertising spend, based on a recommendation from Wallace Barnaby.  No recommendation was rejected.  That would be communicated by Alabaster to Wallace Barnaby.  The budget would reflect the cash flow of Alabaster and the processing capacity of the Appellant.  Normally the instruction to Wallace Barnaby would be simply to place adverts up to a specified budget with previously used and approved media.  Alabaster received details of which advertising had generated each loan application (on the offer authority form – OAF referred to below), and a general summary of advertising yield from the Appellant three or four times a year. 
37.	On occasion advertising space would become available at a late stage, and would be offered to Alabaster through Ekay and Wallace Barnaby, following discussion with the Appellant.  However, if there was insufficient time to obtain a decision from an Alabaster director, the advertisement would not be placed.  We had evidence, which we accept, that this happened on a number of occasions.  No advertising was commissioned without the approval of Alabaster.
38.	As well as the weekly placing of advertising, Alabaster also entered into some longer-term advertising contracts.  We heard evidence on the contract with Yellow Pages.  Paul Thomson of Yellow Pages, at his own instigation, travelled to Jersey to meet Mr Boylan and enter into the contract, to cover a period of one year.  We were referred to the contract between Yell Ltd and Alabaster dated 28 March 2002.  Other longer term arrangements were made between Alabaster and Thomson Pages, Smart Shopper and the Mirror Group.  Alabaster mandated Ekay in May 1999 to explore television advertising, with consequent incurring of cost by Alabaster in production of a video.  Alabaster also entered into an arrangement with Corporate World for the design of a website under the Ocean Finance business name. All these initiatives involved the Appellant, but we find that this is consistent with the Appellant’s role under the Services Agreement.
39.	We were referred to one of the advertisements placed in the Yellow Pages.  This was in the name of Ocean Finance, and did not mention Alabaster by name, or Mr Newey.  Of itself, we find this unremarkable.  Alabaster was not trading in its own name, but under the name of Ocean Finance, for which it had a consumer credit licence.  It would indeed have been odd had the Alabaster name been used.  Furthermore, it is entirely appropriate that the contact number and address used was that of the Appellant, who had the responsibility for processing under the Services Agreement.  In several parts of the Yellow Pages advert there is a reference to “we” that can in terms refer only to the Appellant and not to Alabaster itself.  But we do not regard this as material.  The object of the advertising was to encourage loan applicants to contact Alabaster’s outsourced processing capability in the UK.  It has no relevance in our view to the proper analysis of the respective business activities of Alabaster and the Appellant.
40.	In evidence we heard that when there had been a complaint about one of the Ocean Finance advertisements to the Advertising Standards Authority it had been the Appellant and not Alabaster that had dealt with it.  This was readily explicable by the fact that the ASA had written to the Appellant (as the address for contact in the advert), the complaint impacted upon the reputation of Ocean Finance, which trade name was owned by the Appellant, and the Appellant’s role under the Services Agreement.
The loan broking and processing operations
41.	The effect of the advertising was that the Appellant received applications and enquiries from potential borrowers.  A member of the Appellant’s staff would take basic details from the applicant, including amount of loan sought, income, estimated house value and existing secured loans, in order to determine if the applicant’s circumstances would be likely to satisfy the criteria of any of the lenders on the Alabaster panel.  If the criteria could not be satisfied the application would be rejected at that stage, but at various times there were referral arrangements so that the applicant could be referred to another broker.
42.	If the application appeared potentially acceptable at the initial stage, a no obligation information pack was then sent by the Appellant’s staff to the applicant.  This pack included a guide, application form and authority for the Appellant to deal with any prior mortgagees.  The applicant would return the completed pack to the Appellant.  The Appellant’s underwriting staff would then identify the most suitable lender using lender criteria, and including consideration of the commission rate payable by a particular lender.  At that stage a credit check and electoral roll search on the applicant would be undertaken.  As a result, the Appellant’s staff produced an Offer Authority Form (“OAF”).  We were shown several examples of the OAFs.  These carried a reference number and set out the name, address, date of birth and telephone number of the applicant, the loan amount, term of loan and the identified lender, and underwriting details such as the gross annual income, monthly payment capacity and monthly payment for the loan.  It also included the applicant’s own property valuation, any outstanding mortgage balance and equity.  Finally, it indicated the media source that had generated the enquiry.
43.	The purpose of the OAF was for authority to be sought from Alabaster for the Appellant to send out the provisional offer to the applicant.  The OAFs were faxed daily to Alabaster.  At its peak Alabaster was receiving around 200 faxes per day from the Appellant, a large proportion of which were OAFs.  On receipt at Alabaster’s offices, Lucy Woodworth would collate all the OAFs received in a day.  The evidence of Mr Boylan was that Ms Woodworth would carry out certain checks against lender’s criteria.  This was not conceded by Mr Vadja.  However, we accept that, whether or not formal criteria were used for this purpose, Ms Woodworth did have information on the relevant criteria to enable her to raise queries on OAFs that appeared to be inaccurate, and we were shown transcripts of telephone conversations between Ms Woodworth and the underwriting teams at the Appellant where discrepancies had been identified by Ms Woodworth.  We are satisfied that Ms Woodworth did carry out a review of the OAFs to check that they were correctly completed, and that the proposed loan did not exceed the loan capacity or lending limits.  If discrepancies remained, these could be referred to an Alabaster director or back to the underwriter at the Appellant.  If these problems had not been resolved, we are satisfied that the OAF would have been rejected.
44.	For those OAFs that had been checked and approved, Ms Woodworth would prepare for the Alabaster directors a cover sheet known as an Offer Authority Request (“OAR”).  The OAR was put in front of the pack of the day’s OAFs and together given to an Alabaster director in attendance on that day.  Typically an Alabaster director, usually Mr Hewlett, would attend the Alabaster offices in the afternoon, and sign the OAR for the day.  The approval process generally took around one hour to complete.  A set of deadlines had been established; according to these the OAFs were to be received by Alabaster by 3.30pm and returned to the Appellant by 4.30pm.  Once approved, Ms Woodworth faxed the OARs back to the Appellant, and the Appellant would then send the provisional offer letter to the applicant informing them that, on the basis of the information supplied, the loan request had been accepted.
45.	Mr Vajda drew our attention to one particular set of documentation concerning a loan application.  The OAF had been generated on 21 November 2003, and the OAR was signed off by an Alabaster director on 24 November 2003.  However, the letter of provisional offer to the applicants was itself dated 21 November and contained a cooling-off period expiring on 29 November 2003, which was consistent with it having been sent that day.  However, it was explained by Mr Newey in evidence, and we accept, that no provisional offer would have been sent without the OAR having been approved by Alabaster, and that such a letter would have been withheld pending such approval and that the computer records would be amended so that the appropriate cooling off period was observed, and the documents for signature would not have been sent to the applicant before that period had expired.
46.	Mr Vajda also referred us to the fact that the provisional offer letter to the applicant was on the Appellant’s headed notepaper and that the address and telephone number was of Ocean Finance in the UK.  Mr Newey was named as proprietor and it was the consumer credit licence number of the Appellant, and not Alabaster, that is referred to.  The letter referred to “our lender”, and “we” being required to give the applicant a consideration period; these references could only have been regarded by the applicant as referring to the Appellant and not to Alabaster.  Mr Vajda argued that it was clear from this document that the Appellant was providing credit broking services.  We do not agree.  In a case where processing services, including all the interface with applicants, has been sub-contracted, as here by virtue of the Services Agreement, it is consistent with that outsourcing arrangement for the correspondence with the applicants to be conducted by the sub-contractor in his own name.  The identity of the loan broker itself is not material to the applicant.  The correspondence would be material only to the extent that it reflected the true sub-contract arrangement.  It did not, and we reject the argument that it has any material relevance to the analysis of the business of the Appellant.
47.	In the provisional offer letter the applicant was asked to provide certain further information, including a signed application form, to the Appellant.  On receipt of that further information and documents, the Appellant’s administrative staff carried out required checks, for example of employment, proof of income and checks with the first mortgagee.  In around 75% of cases an independent valuation of the applicant’s property was a requirement of the lender.  The arrangement here was that the Appellant would pay for the valuation, and be reimbursed by Alabaster.  Alabaster could prevent a valuation being carried out if it notified the Appellant within 24 hours of receipt of the particulars of a proposed valuation.  It was explained by Mr Boylan that this was necessary as Alabaster was ultimately responsible for payment for the valuation.  The Appellant’s staff would collate the relevant information and fax to Alabaster a Notification of Valuation.  Lucy Woodworth would check these notifications for error and put them together with a cover sheet entitled Approval of Valuation Orders.  These were then placed before an Alabaster director for approval, which consisted of initialling in the margin opposite the name and reference number of the applicant.  No valuation request was ever denied; there was never a time when Alabaster’s cash flow would have required any such request to have been turned down.  Ms Woodworth would then fax back to the Appellant the Approval of Valuation Orders.  The collation and approval of Notifications of Valuation took about one hour; according to the deadlines the Notification of Valuation was to be received by Alabaster by 3.45pm and returned to the Appellant by 4.45pm.
48.	The Appellant’s staff would then collate all the information that was required to go to the lender and prepared the Case to Bank Submission Sheet.  This consisted of a list of items to be sent to the lender, with a tick box for completion by the Appellant’s staff.  These sheets, but not the items listed, were faxed by the Appellant’s staff to Alabaster, where Ms Woodworth would collate them together with a cover sheet for approval by an Alabaster director.  Following approvals the approved Case to Bank Submission Sheets would be faxed back to the Appellant.  This process at Alabaster took about two hours.  The deadline for receipt of the Case to Bank Submission Sheets was 2.30pm and the last time for their return to the Appellant was 4.30pm.
49.	Following receipt from Alabaster of the relevant approval for case to bank, the underwriter at the Appellant would send the completed loan application to the lender, along with the documents for execution.  No completed application forms were sent to a lender without the Case to Bank Submission having been approved by Alabaster.  Any further queries were dealt with by the Appellant’s staff.
Further findings of fact
50.	Mr Vajda argued that there was no business advantage to the operation of Alabaster in Jersey, and that Alabaster was not run in a commercial manner.  He said that the operations we have described of signing off forms such as OAFs were not normal commercial practice.  We accept that, if compared with an arrangement that might have been entered into between independent parties operating at arm’s length, the arrangements lack certain commercial features.  It is true, and the Appellant accepted, that the loan broking business could have been carried out in the UK, and the loan broking business could have been pursued with an integrated, rather than sub-contracted, processing service.  Nevertheless, we find that Alabaster carried on a commercial business.  It was itself a commercial enterprise, carrying on economic activities of loan broking for which it equipped itself to a limited extent with its own staff and directors, and to a large extent through engaging the services of the Appellant under the Services Agreement.  This was no brass plate company.  Nor do we consider that it is in any way material to the question of commerciality that advice on the decision-making processes in Alabaster had been given by Moore Stephens.
51.	Mr Vajda referred us to a submission made by the Appellant to the Office of Fair Trading that had been written by its recently-appointed compliance officer, who had previously worked as an underwriter in the business.  That submission had been made in response to a fact-finding study by the OFT into the UK debt consolidation market.  In it the Appellant described the way the Ocean Finance business operated, and did not distinguish between the Appellant and Alabaster.  We do not find this to be indicative of the true relationship between the Appellant and Alabaster, or as being relevant to a consideration of the nature of the Appellant’s business.  In our view that is established by the contractual arrangements and the actual course of dealings, and not by a summary that, it seems to us, is directed at a completely different purpose, and for which the actual business structure would not be of any relevance.
52.	It is common ground that the Appellant’s operation in the UK was a substantial one.  We were referred to the salaries of senior staff and underwriters in the UK, which were substantial when contrasted with those of the Alabaster directors and Lucy Woodworth.  However, this merely emphasises the extent of the processing operation that Alabaster had contracted to equip itself to conduct its loan broking business.  We do not infer from this that it must have been the Appellant that was carrying on the loan broking business.  We are satisfied that the loan broking business was carried on by Alabaster, with the services of the Appellant provided through the Services Agreement.
53.	There was much reference by Mr Vajda in cross-examination of both Mr Boylan and Mr Newey to Alabaster “rubber stamping” decisions of others.  This was put to the witnesses in connection with all stages of the processes, including advertising approvals, the OAFs, valuation requests and Case to Bank Submissions.  It was also described as “window dressing”.  Having considered all the evidence, we do not consider that the activities of Alabaster in these respects can properly be described as either “rubber stamping” or “window dressing”.  Those expressions might be apt in a case where documents are merely signed mindlessly, but we find that is not the case here.  Alabaster obtained advice and recommendations, for example in relation to advertising, and it contracted underwriting and other administrative services to the Appellant.  It relied on the Appellant to provide input into the advertising campaigns and the terms on which lenders were added to its panel.  Having obtained such advice and assistance, it had its own staff to collate certain of the material.  The fact that, having engaged all those services, it consistently chose to follow and adopt them does not in our view amount to rubber stamping or window dressing, and we so find. 
Issue (1): Characterisation of the supplies
54.	As we have described, the essence of HMRC’s submissions on the first issue, that of the proper characterisation of the supplies for VAT purposes of loan broking services and advertising services, is that it was the Appellant who supplied the loan broking services and that the advertising supplies were made to him.  For the Appellant Mr Ghosh argued that the supplies of loan broking services were made by Alabaster, and that Alabaster, and not the Appellant, was the recipient of the advertising services.
55.	The starting point in any analysis of what supplies have been made or what supplies have been received in any given circumstances is the statutory definition of what is a supply.  This is found in section 5(2) of the VATA, as follows:
“…
(a) supply” in this Act includes all forms of supply, but not anything done otherwise that for a consideration;
(b) anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services.”
56.	It is clear from Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588 that questions of the characterisation of a supply cannot be determined wholly by reference to the concept of contractual duty.  Whilst the construction of a contract between two or more parties is relevant to the enquiry as to the proper analysis of the relevant supply for VAT purposes, it is not determinative.  Nevertheless the contract is one of the factors on which an overall view must be taken.
57.	Reed carried on business providing temporary nurses to hospitals.  The nurses were self-employed, but Reed retained a high degree of control over their activities.  Reed argued that it had acted as a recruiting agency and had not, as the Commissioners had contended, supplied nursing services to the hospitals.  The nurses had supplied their services directly to the hospitals.  The tribunal allowed the appeal holding that the contractual documents between Reed and the nurses and between Reed and the health authorities led to the conclusion that Reed had supplied nursing staff and not nursing services, and that Reed’s services had been those of agent, the consideration for which was the commission received.
58.	On an appeal by the Commissioners from the Tribunal’s decision, in the High Court Laws J made the following initial observations (at p 591):
“I certainly accept that where any issue turns wholly upon the construction of a document having legal consequences, the exercise of construction is one of law for the judge. But for the proper resolution of a case of this kind, there are I think two qualifications. The first is that the concept of making a supply for the purposes of VAT is not identical with the performance of an obligation for the purposes of the law of contract, even where the obligation consists in the provision of goods or services. The second is that, in consequence, the true construction of a contractual document may not always answer the question—what was the nature of the VAT supply in the case?”
59.	He then considered the Commissioner’s argument that the contractual documents conclusively determined, in the Commissioner’s favour, the nature and identity of the supplies made by Reed.  He held that they did not.  He reiterated his point that the concept of supply is not identical with that of contractual obligation, and said (at p 595):
“… in consequence, it is perfectly possible that although the parties in any given situation may conclude their contractual arrangements in writing so as to define all their mutual rights and obligations arising in private law, their agreement may nevertheless leave open the question, what is the nature of the supplies made by A to B for the purposes of A's assessment of VAT. In many situations, of course, the contract will on the facts conclude any VAT issue, as where there is a simple agreement for the supply of goods or services with no third parties involved. In cases of that kind there is no space between the issue of supply for VAT purposes and the nature of the private law contractual obligation. But that is a circumstance, not a rule. There may be cases, generally (perhaps always) where three or more parties are concerned, in which the contract's definition (however exhaustive) of the parties' private law obligations nevertheless neither caters for nor concludes the statutory question, what supplies are made by whom to whom. Nor should this be a matter for surprise: in principle, the incidence of VAT is obviously not by definition regulated by private agreement. Whether and to what extent the tax falls to be exacted depends, as with every tax, on the application of the taxing statute to the particular facts. Within those facts, the terms of contracts entered into by the taxpayer may or may not determine the right tax result. They do not necessarily do so. They will not do so where the contract, though it tells all the parties everything that they must or must not do, does not categorise any individual party's obligations in a way which inevitably leads to the conclusion that he makes certain defined supplies to another. In principle, the nature of a VAT supply is to be ascertained from the whole facts of the case. It may be a consequence, but it is not a function, of the contracts entered into by the relevant parties.”
60.	In light of the comments here of Mr Justice Laws regarding simple contracts with no third parties, Mr Ghosh argued that in each of the cases of the advertising services and the loan brokerage services the contracts were purely bilateral, and were not in the nature of the multi-lateral contracts referred to by Laws J as requiring further contractual analysis.  We do not agree.  Mr Justice Laws in Reed made explicit that his remarks on the position of bilateral contracts amounted to a circumstance and not a rule.  We do not consider that the agreements at issue in this appeal are simple agreements of the nature referred to by the learned judge.  There are a number of contracts between a number of parties: the contracts for the provision of loan broking services by Alabaster to the lenders, the contract between Wallace Barnaby and Alabaster for the advertising services and the Services Agreement between Alabaster and the Appellant.  These contracts must all be considered as part of the overall factual circumstances.  Whilst the Appellant was not party to Alabaster’s contracts with the lenders or Wallace Barnaby, it was part of the overall factual circumstances and accordingly those circumstances and its involvement must be considered in determining the nature of the respective supplies and whether, in the case of the advertising services, those supplies were to the Appellant and not to Alabaster and, as regards the loan broking services, those supplies were made by the Appellant and not by Alabaster.
61.	In Customs and Excise Commissioners v Redrow Group plc [1999] STC 161, the Redrow group operated a sales incentive scheme whereby it agreed to pay the fees of estate agents it instructed in the sale of the existing house of a prospective purchaser of one of its new homes if and when the purchaser completed on the purchase of a new home built by the group.  Redrow claimed input tax credit in respect of the estate agents’ fees incurred under the scheme on the ground that the estate agents’ services were supplied to it as well as to the purchaser.  The House of Lords held that, although the estate agents were clearly supplying services to the prospective purchasers, as they were engaged in the marketing and sale of the existing homes which belonged to the prospective purchasers and not to Redrow, the transactions between Redrow and the estate agents could only be described as the supply of services for a consideration to Redrow.
62.	Redrow was followed and the guidance given by Laws J in Reed was referred to with approval by the Court of Appeal in WHA Ltd and another v Customs and Excise Commissioners [2004] STC 1081.  As with the present case WHA was concerned both with the determination of the proper recipient of the supplies in question and abuse of law, although the issues were dealt with in separate judgments of the Court of Appeal.  In WHA an insurance company, NIG, issued motor breakdown insurance policies to car buyers.  The whole of NIG’s risk under the policies was reinsured with Crystal, which was part of the Oriel group of companies, and was incorporated and trading in Gibraltar.  Crystal retroceded 85% of the risk to Viscount, another Gibraltar based Oriel company.  Viscount delegated claims handling to WHA, another Oriel company, this time based in the UK.  WHA set up arrangements with approved garages under which the work that might be necessary in the event of the breakdown of an insured’s car would be done and paid for by WHA if it were within the terms of the policy and authorised by WHA.  It was held that, by carrying out works of repair to a vehicle under a policy, pursuant to the authority of WHA, who then paid for the repairs, the garage made a supply of services to WHA, as a result of which WHA was in principle entitled to claim input tax in respect of the VAT it paid on the garage’s invoice submitted in respect of the cost of the repairs.
63.	As well as approving the guidance in Reed, Neuberger LJ agreed with Lloyd J at first instance in WHA ([2003] STC 648 at [23]) that “[t]he contractual position is not conclusive as to what taxable supplies are made to whom, but it must be the starting point”.  He then examined the essential features which had been put forward to justify the conclusion that the garage made a supply of services to WHA.  He said (at [36] to [38]):
“[36] The essential features which are said to justify the conclusion that the garage makes a supply of services to WHA are as follows. First, the invoice is in respect of work carried out by the garage pursuant to an instruction by WHA. Secondly, the only contractual relationship, pursuant to which the work the subject of the invoice is carried out, exists under an agreement between WHA and the garage. Thirdly, the only person who is liable to pay the garage in respect of that work is WHA. Fourthly, WHA gets into the contractual relationship with the garage in the course of its business. Fifthly, by ensuring the garage carries out the work, WHA fulfils its obligation to Viscount under the claims handling agreement, and also becomes entitled to earn its £17·60 in respect of the claim resulting in the works. 
[37] In these circumstances, it appears to me that, unless there is some reason for reaching a contrary conclusion, there is indeed a 'supply of services' by the garage to WHA when the garage carries out repair work to a vehicle under a policy. Given the very wide definition of 'services' in s 5(2)(b), it is hard to resist the conclusion that, if something is supplied to WHA, it can be described as 'services': WHA receives a benefit from the carrying out of the repairs (namely satisfaction of an obligation to Viscount and the ability to earn the £17·60) and it is work which WHA will have authorised to be done. The fact that there is another beneficiary of the work, who may even fairly be said to be the primary beneficiary, namely the owner of the vehicle, should not, at least of itself, prevent the arrangement operating as a supply of 'services' to WHA.
[38] It further appears to me that the services in question are 'supplied' to WHA. Again, the fact that they are also provided to the vehicle owner does not, to my mind, prevent them from being treated as 'supplied' to WHA. The fact that WHA authorises and pays for the work, and, indeed, is rendered the invoice for the work, serves to underline this conclusion. Of course, if any of these steps could be regarded as sham or bogus, different considerations might well apply. But, at least unless it is necessary to resort to the further arguments, which impinge on the scheme as a whole, no such contention has been raised in the present case.”
The further arguments to which Lord Justice Neuberger is referring to here are the abuse of law arguments.
64.	In WHA, the conclusion that the garage services were supplied to WHA, albeit that they were also provided to the car owner, was considered by Neuberger LJ to be supported by Redrow.  We have summarised the facts in Redrow above.  In Redrow, as quoted by Neuberger LJ in WHA at [42] to [43]:
“Lord Hope of Craighead said that: '[t]he primary facts seem to me to support the conclusion which it reached on this issue' (see [1999] STC 161 at 165, [1999] 1 WLR 408 at 412). He continued ([1999] STC 161 at 166, [1999] 1 WLR 408 at 412):
'The estate agents received their instructions from Redrow and, so long as the prospective purchasers completed with Redrow, it was Redrow who paid for the services which were supplied. I do not see how the transactions between Redrow and the estate agents can be described other than as the supply of services for a consideration to Redrow. The agents were doing what Redrow instructed them to do, for which they charged a fee which was paid by Redrow.'
[43] Lord Hope went on to make some general observations which, like Lloyd J ([2003] STC 648 at [29]), I consider are worth repeating (see [1999] STC 161 at 166, [1999] 1 WLR 408 at 412–413):
'The word “services” is given such a wide meaning for the purposes of VAT that it is capable of embracing everything which a taxable person does in the course or furtherance of a business carried on by him which is done for a consideration. The name or description which one might apply to the service is immaterial, because the concept does not call for that kind of analysis. The service is that which is done in return for the consideration … Questions such as who benefits from the service or who is the consumer of it are not helpful. The answers are likely to differ according to the interest which various people may have in the transaction. The matter has to be looked at from the standpoint of the person who is claiming the deduction by way of input tax. Was something being done for him for which, in the course or furtherance of a business carried on by him, he has had to pay a consideration which has attracted VAT? The fact that someone else, in this case, the prospective purchaser, also received a service as part of the same transaction does not deprive the person who instructed the service and who has had to pay for it of the benefit of the deduction.' ”
 
65.	Mr Ghosh submitted that the features identified in WHA as leading to the conclusion that the garage supplied its services to WHA were essentially replicated in this case as regards the advertising services.  Thus, first, the instructions to Wallace Barnaby in respect of those advertising services were given by Alabaster in the form of Alabaster’s acceptance of the recommendations made to it by Wallace Barnaby.  Secondly, the only commercial relationship in respect of those services was between Alabaster and Wallace Barnaby.  Thirdly, only Alabaster was liable to pay Wallace Barnaby.
66.	Unlike in WHA, in this case there is no agreement whereby one party is to pay for services to be supplied to another.  In WHA, once it was determined that WHA was the payer for the services to be rendered by the garage to the car owners, the only question was whether WHA would receive anything at all for the carrying out of the work.  In this case, Alabaster received the advertising services itself for the purposes of its business, under a contract between Alabaster and Wallace Barnaby.  Alabaster paid the whole consideration for those services.  There was therefore in our judgment only a supply of the advertising services to Alabaster and not to the Appellant.  This conclusion is not affected by the fact that, indirectly, the Appellant also benefitted from the advertising that was supplied.  It enabled the Appellant to receive enquiries from prospective borrowers which, if converted into loans, resulted in the Appellant earning commission under the Services Agreement.  But that does not mean that the circumstances can result in the Appellant being regarded for VAT purposes as having received a supply of the advertising services itself.  On the facts we have found, Alabaster was a commercial enterprise carrying on its own economic activities, for which it had equipped itself to perform through the Services Agreement with the Appellant.  Although we consider that the question of the proper analysis of the supplies in this case must be approached by consideration of the whole facts and not just the contracts under which the services are provided, having done so there is nothing in the factual situation in this case that would lead us to conclude that either the advertising supplies were made to the Appellant or the loan broking supplies were made by the Appellant.
67.	Mr Vadja sought to distinguish WHA from the present case.  He said that in WHA it was clear from the facts that WHA itself had agreed labour rates and parts discounts and WHA issued a claims procedure leaflet to the garages.  In short, WHA not only had a contractual relationship with the garages, it also had a business relationship.  On this basis he said that in WHA there was the necessary reciprocity between the garage and WHA and that was why, on the facts of that case, it was found that the garage was making a supply to WHA.  He contrasted that with the facts in this case where he argued that despite the contractual relationship between Alabaster and the lenders HMRC did not accept that there was a business relationship.  He submitted that the real business relationship was between the Appellant and the lenders.  We do not accept this submission.  We consider that on the facts of this case it was Alabaster that had a business relationship with the lenders.  Just as if it had done so through its own staff in Jersey, Alabaster carried on that business relationship, having equipped itself to do so through the Services Agreement with the Appellant.  The mere fact that functions are performed through an outsourcing arrangement does not mean that the principal who has sub-contracted those functions out to another party should be regarded as not having the business relationship with its own contractual counterparties.
68.	Mr Vadja sought also to distinguish Redrow on its facts.  Although we agree that the facts in this case are not the same as those in Redrow, we do not accept that this would compel or permit us to apply any different principles from those expressed in Redrow.  Mr Vadja also argued that to adopt a rule that the supply is received by the payer would negate the concept of third party consideration.  Our view is that in a case where there is no question of it being argued that the consideration for the supply is third party consideration, the Redrow principles are clearly applicable and must be applied to the facts as we have found them.
69.	Mr Vadja referred us to Auto Lease Holland BV v Bundesamt für Finanzen [2005] STC 598, a case in the European Court of Justice concerning the recipient of a supply of goods.  Auto Lease was a company registered in the Netherlands which leased motor vehicles.  The lessee was given the option of entering into a fuel management agreement whereby he could fill up the leased vehicle with fuel using a credit card issued in the company’s name.  The company accounted to the credit card company for the fuel purchased by the lessee and the lessee made a monthly payment to the company of an amount equal to one-twelfth of the estimated fuel cost.  At the end of the year there was a settlement, according to actual consumption, between the company and the lessee.  The context was Article 5(1) of the Sixth Directive, which provided that a “supply of goods” means the transfer of the right to dispose of tangible property as owner.  The case turned therefore on the question who had the right to dispose of the goods as owner.  This was held to be the lessee, who also bore the financial responsibility for the actual consumption which was established at the end of the year.  The fuel management agreement was not a contract for the supply of fuel, but a contract to finance its purchase.  The ECJ accordingly held that there was not a supply of fuel by the lessor of a vehicle to the lessee where the lessee filled up at filling stations the vehicle which was the subject matter of a leasing contract, even if the vehicle was filled up in the name and at the expense of that lessor.  The Court of Justice said (at [33] – [36]):
“33. … in order to answer the question referred, it is necessary to determine to whom, whether the lessor or the lessee, the oil companies transferred, in the main proceedings, that right actually to dispose of the fuel as owner.
34. It is common ground that the lessee is empowered to dispose of the fuel as if he were the owner of that property. He obtains the fuel directly at filling stations and Auto Lease does not at any time have the right to decide in what way the fuel must be used or to what end.
35. The argument to the effect that the fuel is supplied to Auto Lease, since the lessee purchases the fuel in the name and at the expense of that company, which advances the cost of that property, cannot be accepted. As the Commission rightly contends, the supplies were effected at Auto Lease's expense only ostensibly. The monthly payments made to Auto Lease constitute only an advance. The actual consumption, established at the end of the year, is the financial responsibility of the lessee who, consequently, wholly bears the costs of the supply of fuel.
36. Accordingly, the fuel management agreement is not a contract for the supply of fuel, but rather a contract to finance its purchase. Auto Lease does not purchase the fuel in order subsequently to resell it to the lessee; the lessee purchases the fuel, having a free choice as to its quality and quantity, as well as the time of purchase. Auto Lease acts, in fact, as a supplier of credit vis-à-vis the lessee.”

70.	Mr Vadja argued that although Auto Lease is a case concerning a supply of goods, the same principles apply to services.  We do not accept this as a general proposition, as the right to dispose cannot be of relevance to a supply of services (which was itself defined by Article 6 of the Sixth Directive as any transaction which does not constitute a supply of goods within the meaning of Article 5), and we do not therefore accept that the test of control that applied in Auto Lease in the case of goods can have any application to services.  On the other hand, having regard to Reed and WHA, we do accept that a supply of services that was ostensibly paid for by one person who was merely financing the rendering of services to another person who had ultimate financial responsibility would normally be treated as a supply of services to that other person.  In Auto Lease, as Neuberger LJ remarks in WHA (at [63]), considerable weight was attached to the fact that it was the lessee, rather than Auto Lease, who ultimately paid for the fuel.  It was suggested that this might have been invoked so as to look behind WHA to Viscount (or even to Crystal or NIG).  However, even on this basis, there is no question in our view, that the Appellant somehow ultimately paid for the services of Wallace Barnaby.  The Appellant was the owner of the share capital of Alabaster and had, during its initial trading, provided it with working capital by means of an interest-free loan which had, at the material time, been repaid.  No financial guarantees were given in respect of Alabaster’s liability to Wallace Barnaby under the contract between those two parties.  The commission earned by the Appellant was based on gross commissions and not net profits, so was unaffected by the cost of the advertising.  We do not consider that the fact that the arrangements between the Appellant and Alabaster were not at arm’s length can lead to the conclusion that the Appellant had ultimate responsibility for the payment for Wallace Barnaby’s services.  We find that the Appellant did not bear financial responsibility for the consideration for the services provided by Wallace Barnaby to Alabaster.
71.	Mr Vadja referred us to Belgian State v Temco Europe SA [2005] STC 1451.  In that case, before the Court of Justice, Temco had a cleaning and maintenance business for which it was liable to VAT.  It deducted VAT invoiced in connection with refurbishment work carried out on a building which it owned but did not occupy for its business.  It entered into contracts with three companies in the same group and under the same management that allowed those companies to occupy the building for their activities without any individual rights over any specific part of the property.  The question for the Court was whether the grants of these licences were transactions comprising the letting of immovable property.  The Court held that they were.  We do not derive any direct material assistance from Temco.  Essentially, so far as relevant to this appeal, we regard Temco as doing no more than confirming that, in considering the nature of a supply, all the circumstances surrounding the relevant transaction should be considered in order to establish its characteristics, and that this includes the essential object of the relevant contracts.  Temco reiterates the principle that in considering the legal effect of a transaction the entire transaction must be examined and that, as Reed tells us, the terms contractually agreed and the legal rights and obligations of the parties may not be determinative as to the true nature and effect of the transaction for VAT purposes.  Our only observation is that, when all the facts and circumstances have been taken into account, it remains the case that the proper analysis of the supply might well be consistent with the contractual position.
72.	The same theme can be derived from Tesco v Customs and Excise Commissioners [2003] STC 1561, a case concerning Tesco’s “Clubcard” scheme and whether the vouchers issued in relation to points earned by customers when purchasing goods were granted for a consideration such that the cost of the vouchers, namely the value of the points awarded to Clubcard members, fell to be disregarded for VAT purposes.  We were referred in particular to the judgment of Jonathan Parker LJ (with whom the other Lords Justices agreed) at paras [159] and [160].  We need not set these out in full.  Essentially, it was held that the correct approach to the analysis of the Clubcard scheme was to examine the entire cycle of transactions in order to determine objectively (that is to say without regard to the parties’ subjective intentions, save in so far as they are reflected in the terms of the scheme), and having regard to the scheme’s economic purpose, whether its legal effect is such that the vouchers were issued for “consideration” in the Community sense of that term.  This approach is consistent with that in Redrow and Reed, and Jonathan Parker LJ referred to Reed in concluding that the terms contractually agreed may not be determinative of the true nature and effect of a scheme and that it was necessary to consider what is the economic purpose of the scheme, or “the precise way in which performance satisfies the interests of the parties”, as the Advocate General (Tizzano) put it in Customs and Excise Commissioners v Mirror Group plc (Case C-409/98) [2001] STC 1453 (at para 27).
73.	Both Mr Ghosh and Mr Vadja referred us to the citation by Jonathan Parker LJ in Tesco of the opinion of the Advocate General (Stix-Hackl) in Town and Country Factors Ltd v Customs and Excise Commissioners (Case C-498/99) [2002] STC 1263.  Referring to Tolsma v Inspecteur der Omzetbelasting Leeuwarden (Case C-16/93) [1994] STC 509, the Advocate General said (at paras 38 to 41):
 “38. Whether there is a 'legal relationship' in the Tolsma sense cannot depend, moreover, on the presence of specific legal characteristics, in particular contractual or procedural ones, such as enforceability in legal proceedings. Since the conditions for the existence and content of legal relationships vary according to national legal systems, that would also be incompatible with the principle of fiscal neutrality and the objective of harmonisation of VAT. Otherwise the inclusion of a 'binding in honour only' clause could open the way to tax evasion.
39. All that need be examined is whether the components of reciprocal performance are exchanged in the framework of agreements—even ones that are binding in honour only—from which it is apparent that there is a direct link between them.
40. In the Tolsma case there were no agreements of any kind whatever which might have created a link between service and payment sufficient for it to be possible to speak of a transaction 'for consideration' within the meaning of art 2 of the Sixth Directive; the 'provider of the service' (in that case a street musician) admittedly received certain sums 'for his service', but the 'recipients of the service' paid them purely voluntarily and in principle received the service regardless of their 'consideration' (see [1994] STC 509, [1994] ECJ I-743, para 17).
41. In contrast to the Tolsma case, in cases such as that in the main proceedings there is indeed a type of agreement under which the entry fee is paid for the service provided by the organiser of the competition. To be able to take part in the competition, the competitor must accept the rules imposed by the organiser and undertake to comply with all the terms of the agreement, including the rules of the competition. Only if the contestant—on the one hand—submits the entry form under those conditions and pays the corresponding fee can he—on the other hand—take part in the competition and be given a chance of winning a prize.”
It was common ground before us that the approach to the question whether a supply was “for a consideration” had developed from the Tolsma test of legal relationship to one of reciprocity, even in the absence of a legally binding agreement.
74.	On the basis of the authorities, Mr Vadja argued that the primary question to be answered is: what are the essential characteristics of the transactions that are at play in this case?  He submitted that the essential characteristic of the loan broking transaction is the matching of a prospective borrower with a suitable lender.  This was done by one of the underwriting teams employed by the Appellant in Staffordshire.  Another essential characteristic is advertising, as that is the means to procure potential borrowers applying for loans.  The advertisements in this case gave the Appellant’s business address and telephone contact details in the UK.  The Appellant had a commercial relationship with the lenders, and negotiated (subject to approval by Alabaster) the commission rates.  The advertisements were not, he submitted, supplied for the purpose of anything that Alabaster did in Jersey.
75.	As regards reciprocity, the approach signalled by Town and Country, Mr Vajda submitted that in a loan broking business the reciprocity was between the lenders and the broker, and that in this case that reciprocity lay between the lenders and the Appellant.  This was based on the business dealings between the Appellant and the lenders.  A similar submission was made in respect of the Appellant’s role in the advertising process.  We do not consider that on the facts of this case there was reciprocity between the Appellant and the lenders nor between the Appellant and Wallace Barnaby in relation to the advertising services so as to conclude that supplies of loan broking services were made by the Appellant to the lenders or supplies of advertising services by Wallace Barnaby to the Appellant.  Mere business relationships of the nature we have found in this case do not amount to reciprocal performance such as to conclude that a supply has been made on the basis of those relationships for a consideration.  The services provided by the Appellant were to Alabaster and Alabaster provided the consideration, in each case under the Services Agreement.  That was a legal relationship under which there was full reciprocity and, although it is not necessary for there to be a legal agreement in order to find reciprocity, we do not detect in the relationships and dealings between the Appellant and the lenders anything in the nature of a link between service and payment sufficient for there to be a transaction between them “for consideration”.  We find the same in relation to the advertising services of Wallace Barnaby.  The role played by the Appellant in that respect was wholly consistent with the supplies it made to Alabaster under the Services Agreement, for which the Appellant received consideration from Alabaster.  There was no relevant link between the Appellant and Wallace Barnaby; certainly not one that could lead us to conclude that there was a transaction between Wallace Barnaby and the Appellant for consideration.  Contrary to Mr Vadja’s submission, the advertising services were in our view supplied to Alabaster for the purposes of its business, which it carried on with the benefit of the services of the Appellant under the Services Agreement.
76.	Mr Vadja also submitted that if we consider the economic purpose, one of the factors described by Jonathan Parker LJ in Tesco, we should conclude, viewing the transactions objectively, that it was the earning of profits by the lenders through making loans to borrowers introduced by the intermediary, and the earning of profits by the intermediary in matching potential borrowers to lenders.  Furthermore, he argued that the economic purpose of the advertising services, viewed objectively, was to enable the intermediary to carry on the activity of providing borrowers to lenders.  Mr Vadja argued that these economic purposes were fulfilled by the Appellant.  The involvement of Alabaster did not change or alter the economic purpose.
77.	We accept that we must have regard to the economic purpose of the contracts.  However, we do not consider that this would entitle us to reach a conclusion that ignores the substance of how that economic purpose is achieved.  Indeed, in this context, economic purpose is the economic purpose of the contract, described, as we have noted previously, in para 27 of his opinion in Mirror Group by Advocate General Tizzano as “the precise way in which performance satisfies the interests of the parties”.  The activities of the Appellant were all carried out under the Services Agreement.  Performance of that agreement satisfied the interests of Alabaster and the Appellant.  Performance by Alabaster of its contracts with the lenders satisfied both parties to those respective contracts.  Performance of the contract between Alabaster and Wallace Barnaby did likewise.  Where A provides services to B for consideration, the fact that A may thereby have business dealings on behalf of B with C, with whom B has a contract for supplies of services, and that A, whether through its commission arrangements with B, or through any financial interest in B, benefits from B’s own contractual relationships with C, does not have the effect that A must be treated as making or receiving supplies made by or to B.  That in our view would be to regard economic effect as a test, which the Court of Appeal in Customs and Excise Commissioners v Littlewoods Organisation plc [2001] STC 1568 (per Chadwick LJ at [84]) rejected.  It seems to us that Mr Vadja’s argument on economic purpose essentially invited us to ignore the transactions involving Alabaster.  In our view the proper approach to the analysis of a supply does not permit such a course.
78.	For these reasons, as regards the first issue, we decide that it was Alabaster, and not the Appellant, that made the supplies of loan broking services to the lenders, and that it was Alabaster, and not the Appellant, that was the recipient of the supplies of advertising services.
Issue (2): Abuse of law
79.	On the basis of our decision on the first issue, we now turn to the second, namely whether the “scheme”, by which we mean the transactions involving Alabaster in making supplies of loan broking services and of receiving supplies of advertising services, was an abuse of the Sixth Directive.
80.	In the VAT context the principal guidance on the application of the abuse principle is the decision of the ECJ in Halifax plc and others v Customs and Excise Commissioners (Case C-255/02) [2006] STC 919.  That case concerned a scheme entered into by Halifax to avoid irrecoverable input tax on the construction costs of a number of call centres in the UK.  As a bank, Halifax made exempt supplies and so VAT incurred by it would have been largely irrecoverable.
81.	In its judgment the ECJ referred to its own settled case law to the effect that Community law cannot be relied upon for abusive or fraudulent ends (para 68), and held that this applied equally to VAT.  The Court found that (at paras 69 to 70):
“69. The application of Community legislation cannot be extended to cover abusive practices by economic operators, that is to say transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Community law (see, to that effect, Firma Peter Cremer v Bundesanstalt für Landwirtschaftliche Marktordnung (Case 125/76) [1977] ECR 1593, para 21; General Milk Products GmbH v Hauptzollamt Hamburg-Jonas (Case C-8/92) [1993] ECR I-779, para 21; and Emsland-Stärke (C-110/99), para 51).
70. That principle of prohibiting abusive practices also applies to the sphere of VAT.”
82.	The Court referred to the need for legal certainty and the forseeability of the application of the law by those subject to it, and noted (at para 72) that the requirement of legal certainty must be observed all the more strictly in the case of rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which they impose on them.  Furthermore, the Court made it clear that tax considerations may be a factor in a trader’s choice between exempt and taxable transactions, and in particular that taxpayers may choose to structure their businesses to limit tax.  The Court said (at para 73):
“73. Moreover, it is clear from the case law that a trader's choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the VAT system (see, in particular, BLP Group [1995] STC 424, [1996] 1 WLR 174, para 26, and Customs and Excise Comrs v Cantor Fitzgerald International (Case C-108/99) [2001] STC 1453, [2002] QB 546, para 33). Where the taxable person chooses one of two transactions, the Sixth Directive does not require him to choose the one which involves paying the highest amount of VAT. On the contrary, as the Advocate General observed in para 85 of his opinion, taxpayers may choose to structure their business so as to limit their tax liability.”
83.	The Court went on to describe, having regard to these considerations, the principles to be applied in determining if an abusive practice could be found in any particular circumstances.  The Court said (at paras 74 to 76, and paras 80 to 81):
“74. In view of the foregoing considerations, it would appear that, in the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.
75. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. As the Advocate General observed in para 89 of his opinion, the prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages.
76. It is for the national court to verify in accordance with the rules of evidence of national law, provided that the effectiveness of Community law is not undermined, whether action constituting such an abusive practice has taken place in the case before it (see Eichsfelder Schalchtbetrieb (Case C-515/03) [2005] All ER (D) 306 (Jul), para 40).
…
80. To 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. 
81. As regards the second element, whereby the transactions concerned must essentially seek to obtain a tax advantage, it must be borne in mind that it is the responsibility of the national court to determine the real substance and significance of the transactions concerned. In so doing, it may take account of the purely artificial nature of those transactions and the links of a legal, economic and/or personal nature between the operators involved in the scheme for reduction of the tax burden (see, to that effect, Emsland Stärke [2000] ECR I-11569, para 58).”
84.	In Halifax, as we have described, the abusive practice was the deduction of VAT that would otherwise have been irrecoverable.  In that context the ECJ held that where, applying the stated principles, there was a finding of an abusive practice, there arose an obligation to repay deductions of input VAT thereby found not to have been due to be repaid, and that this would be achieved by a redefinition of the relevant transactions.  The Court said (at paras 93 to 98):
“93. It must also be borne in mind that a finding of abusive practice must not lead to a penalty, for which a clear and unambiguous legal basis would be necessary, but rather to an obligation to repay, simply as a consequence of that finding, which rendered undue all or part of the deductions of input VAT (see, to that effect, Emsland Stärke [2000] ECR I-11569, para 56).
94. It follows that transactions involved in an abusive practice must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.
95. In that regard, the tax authorities are entitled to demand, with retroactive effect, repayment of the amounts deducted in relation to each transaction whenever they find that the right to deduct has been exercised abusively (Fini H [2005] STC 903, [2005] ECR I-1599, para 33).
96. However, they must also subtract therefrom any tax charged on an output transaction for which the taxable person was artificially liable under a scheme for reduction of the tax burden and, if appropriate, they must reimburse any excess.
97. Similarly, it must allow a taxable person who, in the absence of transactions constituting an abusive practice, would have benefited from the first transaction not constituting such a practice, to deduct, under the deduction rules of the Sixth Directive, the VAT on that input transaction.
98. It follows that the answer to Question 1(b) must be that, where an abusive practice has been found to exist, the transactions involved must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.”
In essence the net effect of the redefinition must be to put both the taxpayer and the revenue authority in the same net position as they would each have been in absent the abusive practice, no more and no less.
85.	We have referred earlier to the WHA case in the context of the analysis of supply in our discussion of Issue (1), and to the fact that an abuse argument was subsequently considered in that case.  In WHA Ltd v Revenue and Customs Commissioners [2007] STC 1695 the Court of Appeal considered Halifax and provided further guidance.  At para [12] Lord Neuberger set out four questions to be answered in considering the abuse issue:
“The abuse issue can usefully be considered by answering four questions, which appear to emerge from the passages I have quoted from the judgment in Halifax. First, does the Scheme, or an aspect of the Scheme, result in the accrual of a tax advantage which, as HMRC assert, is 'contrary to the purpose of' the provisions of the Sixth Directive? Secondly, if so, was it, as HMRC contend, the 'essential aim' of the Scheme, or of the relevant aspect, that a tax advantage be obtained? Thirdly, if so, are there any special features of the Scheme itself, or of the law relating to it, which should nonetheless prevent the abuse argument succeeding? Fourthly, if not, can (and must) the Scheme, or the relevant part, be 'redefined'?”
First element: Is the scheme or part of it contrary to the purpose of the Sixth Directive?
86.	In considering this question the first step is to identify the relevant purpose of the Sixth Directive with which we are concerned, and what is required by “fiscal neutrality” (WHA, per Lord Neuberger, at [14]).  Mr Vadja referred us to para [15] of Lord Neuberger’s judgment where he refers to the case of Elida Gibbs Ltd v Customs and Excise Commissioners (Case C-317/94) [1996] STC 1367, and in particular to the judgment of the ECJ in that case at para 19 where it said that the “basic principle of the VAT system is that it is intended to tax only the final consumer”, and later that the system is based on neutrality.  Lord Neuberger approved the submissions of counsel to HMRC in WHA on the requirement of fiscal neutrality (at [16] to [17]):
“[16] For HMRC, Mr Peacock QC contended that such fiscal neutrality requires the conclusion that an insurer, who provides, in the EU, insurance services which are exempt for VAT purposes, cannot recover input tax attributable to those services. Thus, in what one can fairly characterise as transactions in the context of 'normal commercial operations' of an insurer and a claims handler, such as that embodied in the arrangements which were replaced by the Scheme, there would be no question of the input tax attributable to the cost of repairs and parts being recoverable. Given that the effect of the Scheme, according to our 2004 decision, is that input tax, incurred in the provision of exempt insurance services, is recoverable, HMRC accordingly argue that the Scheme is, at least to the extent that it has such an effect, contrary to the purposes of the legislative purposes of the VAT legislation, as embodied in the Sixth Directive (and now in the 2006 Directive).
[17] It seems to me that, subject to any arguments to the contrary by reference to the background and details of the Scheme or the legislation, this argument is correct. Although Gibraltar companies, namely Viscount and Crystal, are involved in the chain, the truth is that the provision of the services comprising the repairs and parts are provided in the EU to WHA, and what WHA provides, albeit through two Gibraltar companies in the same group, is the provision of claims handling, again in the EU, to a supplier of exempt services in the EU, namely NIG. On the face of it, at any rate, the VAT regime would plainly require that arrangement to result in an overall liability to VAT equal to the tax chargeable on the services, rather than, as results from the Scheme, no net liability whatever to VAT (as Viscount recovers the input tax paid by WHA).”
87.	Both Halifax and WHA were cases concerning the recovery of input VAT which would, absent the arrangements in question, have been attributable to exempt supplies made in the UK and thus would not have been recoverable.  The effect of the arrangements was to make the VAT effectively recoverable.  This case is different.  HMRC argue that the arrangements here constituted an abuse by the Appellant in order to bring the supplies outside the scope of VAT and avoid taxation of supplies (the advertising supplies) within the Community.  They argue that this is contrary to the purpose of the VAT legislation.
88.	Mr Vadja submitted that the logic of the tax requires that persons making exempt supplies in the Community should suffer the tax incurred in making those supplies.  In this case he argued that the “insertion” of Alabaster as the “ostensible” (or, as we have earlier found, the actual) provider of loan broking services, although claimed by the Appellant to result in the consumption by Alabaster of the advertising services in Jersey and to be outside the scope of VAT when Alabaster’s supplies were made in the UK to UK lenders only, all loan applicants were resident in the UK and all advertising appeared in the UK media, in fact constituted objective circumstances which, despite formal observance of the conditions of Community law, result in the purpose of the Community rules not being achieved.  He submitted that there is no difference in principle between an abusive scheme which operates on the basis of creating an entitlement to deduct VAT which would otherwise be irrecoverable and one which operates on the basis of preventing VAT which would be irrecoverable from being incurred in the first place.
89.	As an initial comment we do not accept Mr Vadja’s characterisation of the structure adopted in this case as the “insertion” of Alabaster.  That suggests that Alabaster has simply been introduced into a series of transactions that otherwise remain intact.  That is not the case.  What took place was the wholesale reorganisation of the basis upon which the overall business was operated, with Alabaster (and before Alabaster, Lichfield) undertaking the loan broking services and receiving the advertising services, and the Appellant ceasing to carry on loan broking but instead carrying on the activities of a processor for Lichfield and then Alabaster under the Services Agreement.  Nor do we accept Mr Vadja’s description of the structure as a “Jersey loop”.  There was no loop in this case of the nature found in WHA (the Gibraltar loop); Alabaster conducted its own business activities and was the end-supplier to the lenders and the end-user of the advertising services.
90.	We do not consider that HMRC’s arguments can be sustained.  It seems to us that at all stages those arguments seek to compare the results of the transactions entered into by Alabaster with what would have resulted if exempt supplies had been made in the UK.  To characterise as abusive transactions which result in VAT being recoverable or no VAT being incurred, that VAT must, in our view, be capable of being regarded as irrecoverable by reference to the actual facts and circumstances, such as the making of exempt supplies in the UK, as was the case both in Halifax and in WHA.  If an exempt supplier engineers a scheme to create a deduction or to prevent VAT which would be irrecoverable from being incurred, then we can see the argument (depending on the circumstances) that this could be regarded as contrary to the purpose of the VAT directives.  But in our view this cannot be the case if there is no actual exempt supply that would render any VAT irrecoverable.  Mr Vadja recognised the factual difference between WHA and the instant case in that in WHA there was a recovery of input tax whereas in this case no input tax is incurred because the supplies of advertising services were made in Jersey, but he argued that this was not material in the context of the abuse argument.  We agree that there is no material difference between recovery of VAT otherwise irrecoverable as being attributed to an exempt supply, and not incurring VAT that would otherwise be irrecoverable.  However, there is nothing in the actual circumstances of the transactions with which we are concerned to create that irrecoverability; in our view the absence of any exempt supply in the actual transactions that would render VAT attributable to that exempt supply irrecoverable means that there is no purpose of the VAT legislation to which these arrangements can be contrary.
91.	We do not consider that it is permissible simply to compare what has been done with what could have been done.  It is clear from Halifax that it is not abusive for traders to conduct their business in a particular way, and may do so to limit their liability to tax.  Nor do we consider that it is valid to compare a structure that a trader, or group of traders, might have adopted in the past with the current structure, and to conclude that, if the current structure is more favourable for VAT purposes than the former, the current structure is in consequence contrary to the purposes of the VAT legislation.  In our view what is required in considering the first element of the Halifax test is that the existing arrangements should be viewed as a whole, on their own merits and without being associated with other possible transactions or arrangements, or transactions or arrangements that might have applied in the past, and on that basis should a determination be made whether the existing arrangements are in themselves contrary to the purposes of the VAT legislation.  It seems to us that it would not accord with the principle of fiscal neutrality, or the requirement for legal certainty, if the VAT treatment of transactions or arrangements could differ depending on whether the trader, or a connected or associated person, previously undertook similar transactions through a different structure, and those past transactions gave rise to a more onerous liability to VAT than the transactions or arrangements in question.  This would be the case whether or not the purpose of putting in place the new transactions or arrangements was to obtain a tax advantage.  The two tests for abuse are separate, and the question whether a scheme is contrary to the purpose of the VAT legislation must, in our view, be considered independently of the tax advantage purpose test.
92.	Our view that the existing transactions or arrangements must be considered on their own merits is taken having regard to the submissions of HMRC in WHA which, as we have described, were accepted in that case by the Court of Appeal.  We do not regard the reference in para [16] of WHA to “normal commercial operations” exemplified by the earlier arrangements replaced by the Gibraltar scheme as enabling a prior structure that did involve exempt supplies to be used as the benchmark for recoverability of VAT against which a new structure not involving exempt supplies should be tested.  It seems to us that, in the context of WHA, the normal commercial operations were postulated on the existence of an insurer making exempt supplies in the UK.  This is confirmed, in our view, by the description of the arrangements given by Lord Neuberger (at [17]) where he said that the services comprising the repairs and parts were provided in the EU to WHA and that what WHA provided, albeit through two Gibraltar companies in the same group, was claims handling, again in the EU, to a supplier of exempt services in the EU, namely NIG (the UK insurer).  In this case, by contrast, as we have found, the supplies of loan broking services to the lenders were made by Alabaster, which had no establishment in the UK, and not by the Appellant.  There were no exempt supplies to which irrecoverable VAT could be attributed, and accordingly no identifiable requirement of the VAT regime that there should be an overall liability to VAT equal to VAT that would have been charged on the supplies of advertising services if those supplies had been made, or treated as made, in the UK.
93.	Mr Ghosh argued that the mere fact that Jersey was chosen as a location for Alabaster’s loan broking business, and that the supplies of advertising services were provided there does not constitute abuse.  He referred us to the ECJ cases of Cadbury Schweppes plc and another v Inland Revenue Commissioners (Case C-196/04) [2006] STC 1908 and Centros Ltd v Ervervs–og Selskabsstyrelson (Case C-212/97) [2000] All ER (EC) 481 in support of an argument that the selection of a particular location of itself is not abuse even if that location has been selected for its tax advantages, such as a lower rate of taxation.  We do not find Cadbury Schweppes or Centros to be material to this case.  An argument based on Cadbury Schweppes was made and rejected in WHA.  Lord Neuberger said (at [42]):
“The short answer to this argument is, in my judgment, that advanced by Mr Peacock. He submitted that Cadbury Schweppes was concerned with the right of a business to establish itself in another EU member state to take advantage of that state's beneficial tax regime, whereas the principle relied on here by HMRC, as in Halifax, is that, once it is established, in exercise of its right of establishment, in an EU member state, a business is not permitted to abuse the VAT system within the EU. The correctness of this submission in its application to the facts of this case is borne out by considering the essential nature of the allegedly abusive and artificial contrivance of the Scheme. It was not the establishing of Viscount in Gibraltar: after all, the previous arrangement was not abusive, and the reinsurer, Principal, was established in Gibraltar. It was the involvement of Viscount in the Scheme which was the artificial contrivance, because there was no need or purpose (other than the avoidance of tax) in dividing Principal's former functions between two companies, namely Crystal and Viscount, in creating another link in the claims handling chain, or in retroceding 85% of Crystal's reinsurance liabilities to Viscount.”
In our judgement the establishment of Alabaster in Jersey is not itself abuse unless its functions or activities are such as to be contrary to the VAT legislation.  This is clear from Halifax itself, and as explained in WHA, and the separate line of authority on EU freedom of establishment has no part to play in the analysis.
94.	On the other hand we accept Mr Ghosh’s argument that the VAT code expressly recognises third countries (those outside the EU), in the UK law through section 26 of the VATA and Article 16 of the VAT (Place of Supply of Services) Order 1992.  The fact that the VAT legislation itself provides for the consequences of business being carried on through an establishment in a third country demonstrates that, as Mr Ghosh submitted, something more than such mere establishment must be found if elements of the scheme are to be regarded as contrary to the purposes of the VAT legislation.
95.	For the reasons we have given we conclude that neither the scheme or arrangements involving Alabaster, nor any part of it, was contrary to the purposes of the Sixth Directive.  Having regard, objectively, to those arrangements we find no basis on which the VAT legislation would require a liability to arise.  There was no exempt supply to which irrecoverable VAT should be attached, and neither the fact that the commercial operations could have been carried out in a way that would have given rise to irrecoverable VAT nor that, prior to the Alabaster structure, the Appellant carried on its own business of providing loan broking services such that exempt supplies were made and attributable VAT was irrecoverable in those circumstances is a reason for concluding otherwise.  
Second element: Was the essential aim of the scheme to obtain a tax advantage?
96.	In light of our conclusions on the first element of the Halifax test as regards abuse, that would conclude Issue (2) in favour of the Appellant, but in case we are held to be wrong on that element we turn to consider whether the essential aim of the arrangements involving Alabaster was to obtain a tax advantage, namely that there was no longer a cost of irrecoverable VAT on supplies of advertising services related to the loan broking business.
97.	It was common ground before us that in referring to the “essential aim” of the scheme in Halifax the Court of Justice was not setting down a condition that the accrual of the tax advantage must constitute the sole aim pursued, to the exclusion of other economic objectives.  This was confirmed in Ministero dell’Economica e delle Finanze v Part Service Srl (Case C-425/06) [2008] STC 3132.  There can therefore be a finding of an abusive practice when the accrual of a tax advantage constitutes the principal, and not the sole, aim of the transactions at issue.
98.	It was also common ground that the test to be applied is an objective one.  This follows from the ECJ’s judgment in Halifax at para 81 to which we have referred.  The evidence of Mr Newey was clear, and we have found as a fact, that the sole purpose of the Alabaster structure (along with the Lichfield structure that preceded it) was to obtain the tax advantage of eliminating the irrecoverable VAT that had previously been suffered by the Appellant on supplies of advertising services made to the Appellant in the course of its loan broking business.  That was clearly the subjective intention of Mr Newey when he instructed Moore Stephens to advise on and implement first the Lichfield, and later the Alabaster, structure.  But that of itself cannot be decisive.  This was explained in the opinion of the Advocate General (Maduro) in Halifax at para 69: 
“When the Court takes the view that an abuse exists whenever the activity at issue cannot possibly have any other purpose or justification than to trigger the application of Community law provisions in a manner contrary to their purpose, that is tantamount, in my view, to adopting an objective criterion for the assessment of the abuse. It is true that those objective elements will reveal that the person or persons engaged in that activity had, most likely, the intention of abusing Community law. But it is not that intention that is decisive for the assessment of the abuse. It is instead the activity itself, objectively considered. In that regard, suffice it to imagine, by way of example, a case where A confines himself without further reflection to following the advice of B and to carrying out an activity for which there is no explanation other than securing a tax advantage for A. The fact that A did not have any subjective intention of abusing Community law will certainly not be material for the assessment of the abuse. What matters is not the actual state of mind of A, but the fact that the activity, objectively speaking, has no other explanation but to secure a tax advantage.”
The example given by the Advocate General focuses on the case where it might be argued that the absence of subjective intention of the taxpayer would be decisive.  It may be less likely, where a taxpayer clearly has the relevant subjective intention and no other, that an objective view of the elements of the transactions would conclude that there was an explanation other than securing a tax advantage for the taxpayer.  But it is nevertheless not correct to determine the matter solely by reference to that subjective intention without regard to the objective characteristics of the scheme or arrangements.
99.	We have held that, notwithstanding that certain arrangements were not at arm’s length, viewed objectively the activities of Alabaster had commercial substance.  However, we do not regard that as decisive in the Appellant’s favour in respect of this issue.  That is a finding, not as to the purpose of the structure that was adopted, but as to its effect.  It was argued by Mr Ghosh that the activities of Alabaster could not be described as “commercially pointless”, such as had been decided by the Tribunal in WHA in relation to the retrocession of 85% of the liabilities of Crystal to the other Gibraltar company, Viscount.  That expression was referred to by Lord Neuberger in WHA (at [31]) as meaning “of no value except to enable WHA’s input tax to be reclaimed.”  We regard this expression as referable not to whether the structure once put in place operated commercially and had commercial effect and substance, but to the original purpose for which it was created.  Was there a commercial point in the creation of the structure in the first place?
100.	We do not consider that the commercial substance or effect of Alabaster’s business operations once the arrangements were implemented are conclusive of the question whether the essential aim of the arrangements is to achieve a tax advantage.  In WHA it was held that, although in one sense the purpose of the scheme there was to enable NIG’s liabilities to be performed and reinsured, and of course the scheme had that effect, this could not affect the conclusion that the tax advantage was the sole or main purpose of the scheme.  Collateral beneficial results of a scheme, conceived and implemented purely for tax avoidance purposes must be regarded in the same way (WHA, para [34]).  In our view the same reasoning applies where the tax avoidance purpose involves the establishment of a commercial undertaking if it is the case that, having regard to the context in which it is being established, there is no commercial rationale for such an establishment.  Although the commercial effect of a structure is a factor in determining, on an objective basis, whether the essential aim was the obtaining of the tax advantage, the fact that there is such a commercial effect cannot of itself be decisive of the question.
101.	 Looked at objectively, we conclude that there could have been no purpose in the establishment of either the Lichfield or Alabaster structures other than to obtain the desired tax advantage.  In the context of the Appellant’s former business of loan broking there was no commercial justification for the Appellant ceasing to carry on loan broking and instead to commence the provision of processing services to an associated company in Jersey.  The Alabaster structure would not have been put in place but for the tax advantage sought to be derived.  Furthermore, the way in which the Alabaster arrangements were structured, on the advice of Moore Stephens who provided detailed instructions on how the business was to be conducted to meet the tax requirements, and with directors, staff and premises sourced or provided by Moore Stephens, serves to confirm on an objective view, that this was a structure designed solely for the purpose of obtaining the tax advantage. 
102.	 Accordingly, in respect of the second element of the Halifax test, we find that the essential aim of the Alabaster structure was to obtain a tax advantage.
Redefinition of the scheme
103.	 As we have found that, notwithstanding that the essential aim of the arrangements was to obtain a tax advantage, there was no abuse as those arrangements were not contrary to the purpose of the Sixth Directive, it does not fall to us to redefine the relevant transactions.  However, as before, in case we are found to be wrong, we consider here the question of redefinition. 
104.	 We enter here a hypothetical world.  We need to assume that we had found that, as HMRC contended, the abuse consisted of the avoidance by the Appellant of irrecoverable VAT on the supplies of advertising services.  On that assumption, we do not consider that, as Mr Ghosh suggested, there can be any scope for redefinition being confined to treating Alabaster as belonging in the UK.
105.	 It was common ground that redefinition is mandatory.  This is apparent from the formulation of the ECJ in Halifax to which we have referred.  It may be that in certain circumstances, such as those concerned in WHA, no specific redefinition need be determined, as its only purpose is to work out the VAT consequences (see Lord Neuberger at [57]).  Where, as Lord Neuberger said, the consequences of the scheme in question involve no rights of the tax authorities to demand tax, rights of taxpayers not to be over-taxed nor rights of third parties, as a result of the scheme being abusive, specific redefinition has no purpose.  Those circumstances do not apply in this case.  Were we to have found that the Alabaster arrangements were abusive on the basis argued by HMRC, it would have fallen to us to redefine the transactions so as to re-establish the situation that would have prevailed in the absence of the transactions constituting the abusive practice.
106.	 How far can that redefinition go?  Mr Ghosh referred us to a decision of the VAT and Duties Tribunal (Sir Stephen Oliver QC, Chairman) in The Atrium Club Ltd v Revenue and Customs Commissioners (Decision no V20993) where it was held that there was no abuse, but the Chairman nevertheless went on to consider the question of redefinition.  That decision is not of course binding on us, but it was held that the redefinition suggested by HMRC could not be sustained as, essentially, it did not reflect the real world.  The redefinition proposed would have involved disregarding contracts and transfers of staff, and treating supplies as being made to its members by the club at a time when the club had nothing to offer to those members.
107.	 In our view, redefinition is simply the process by which the abusive elements of the transactions can be disregarded for tax purposes and the tax effects absent those abusive transactions can be restored.  As Lord Neuberger said in WHA (at [57]):
“… it is clear to my mind from what the court said in the very paragraph to which I have just referred that an abusive scheme 'must be redefined'. In other words, once the two hurdles identified in para 86 of the European Court's judgment have been crossed, there is no third hurdle to be crossed before an abusive scheme is, as it were, neutralised.”
Thus it is not the process of redefinition that is important, it is the neutralisation of the abusive scheme.  That neutralisation flows not from the redefinition itself, but as an inevitable consequence of the finding that a scheme is abusive.  The nature of the abuse dictates what is required to be neutralised.  It is not the redefinition that determines how (or if) the abuse is to be neutralised; it is the neutralisation that dictates the redefinition.  If therefore, contrary to our actual decision, we had found that the abuse consisted of the Appellant obtaining the tax advantage that irrecoverable VAT was no longer incurred on the supplies of advertising services attributable to exempt loan broking supplies, we regard Halifax as requiring us in those circumstances to neutralise that advantage by redefining the abusive transactions.  As we stated above, in our view the net effect of that redefinition must be to put both the taxpayer and the revenue authority in the same net position that they would each have been in absent the abusive practice, no more and no less.  That is the essence of neutralisation.  We do not ourselves consider that an abusive practice can be left un-neutralised because a redefinition would have to create a hypothesis that exists outside the real world and disregards contracts or circumstances that then exist, including those involving third parties.  Redefinition is simply a means to an end, and the means adopted by way of redefinition must be such as to achieve that end, namely the cancellation of the abuse, irrespective of the real world constraints.  The creation of such a hypothesis, to our minds, is the essence of redefinition.
108.	 It follows in this case that, if we had found abuse in the manner submitted by HMRC, we would regard ourselves as required to neutralise the tax advantage found abusive by means of a redefinition.  In those circumstances we would have agreed with HMRC that the abusive advantage must be eliminated by treating the Appellant as having received in the UK the supplies of advertising services that under the Alabaster arrangements were made in Jersey to Alabaster, and as making in the UK the supplies of loan broking services that were made by Alabaster.
Appellant’s entitlement to credit
109.	 As a final matter we should also refer to a further argument raised by the Appellant in the event (which is not the case) we had found that the Appellant was liable to an assessment under the reverse charge provisions in section 8(1) of the VATA as the recipient of the supplies of advertising services of Wallace Barnaby.  In that event, argues Mr Ghosh, the Appellant would be entitled to credit for the VAT assessed as input tax attributable to the loan processing services (exempt intermediary financial services within VATA, Schedule 5, Group 5, Item 5) made by the Appellant to Alabaster under the Services Agreement.  It is submitted that these were the only supplies that the Appellant made to which the advertising services could be attributable.
110.	 We do not agree.  We accept in this respect the arguments of Mr Vajda that, firstly if we had found in favour of HMRC on Issue (1) (characterisation of the supplies) Alabaster would be treated as not having received either the advertising services or the intermediary services (and the Appellant would be regarded as having received the advertising services and as having made the loan broking supplies), and secondly if we had found for HMRC on Issue (2) (abuse) the redefinition would have been on the same basis.  The output tax arising under the reverse charge provisions would have been wholly attributable to the exempt broking supplies made or treated as made by the Appellant in the UK and would accordingly have been irrecoverable.
Decision
111.	 In summary:
(1)	On Issue (1) (characterisation of the supplies) we decide that it was Alabaster, and not the Appellant, that made the supplies of loan broking services to the lenders, and that it was Alabaster, and not the Appellant, that was the recipient of the supplies of advertising services.
(2)	On Issue (2) (abuse) we decide that, although the essential aim of the Alabaster structure was to obtain a tax advantage, there was no abuse as neither the scheme or arrangements involving Alabaster, nor any part of them, was contrary to the purposes of the Sixth Directive. 
112.	 For the reasons we have given, we allow this appeal.
Costs
113.	 At the commencement of the hearing we directed that, these proceedings being “current proceedings” for the purpose of Schedule 3 to the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, pursuant to para 7(3) of that Schedule Rule 29 of the VAT Tribunals Rules 1986 should apply, and that Rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 should be disapplied.
114.	 We order costs in favour of the Appellant in a sum to be agreed by the parties or in default of agreement to be assessed by a Costs Judge. 
      
This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

ROGER BERNER

TRIBUNAL JUDGE
RELEASE DATE:23 April 2010