Revenue wields axe over businesses' VAT claims

An incoming case for the European Court of Justice could mark the opening salvo for HM Revenue and Customs to clampdown on the rights of UK businesses' to reduce the burden of VAT.

The Court is to rule whether a so-called 'abuse of rights' doctrine, a concept stemming from French civil law, can be used by British authorities to stamp out lucrative VAT-saving schemes, enjoyed by entrepreneurs and large companies alike.

Already legal experts say HMRC has been forcing companies and their owners to the appeal process, after rejecting VAT savings deeming them illegal under the 'abuse of rights' doctrine.

According to Michael Ridsdale, of law firm Wedlake Bell, these British firms have resorted to appeal their rejected VAT claims "even though no court has actually ruled whether the 'abuse of rights' argument actually applies."

Speaking to Contractor UK, Mr Ridsdale said the ECJ is expected to decide within the next three weeks whether Revenue & Customs Commissioners were right to push for the abuse of rights claim, which accuses the Halifax Group of unacceptable levels of tax avoidance.

"Obviously businesses are able to recover their VAT assuming that their supplies are standard rate VAT purchases. Any large business, like the Halifax in this case, would conduct the transaction in a way to try and avoid the VAT from being irrecoverable," he said.

"Halifax did this through two other companies in its bid to construct four UK call centres, prompting the Revenue to argue that both intermediaries were sought purely for the purposes of tax avoidance, therefore the VAT cannot be claimed back."

In rulings from HMRC, Halifax's use of a SPV (special purpose vehicle) to carry out low value construction services and subsequently claim back £7m in VAT from total building costs of £48m, was deemed to be purely for the purposes of creating a tax advantage.

The Commissioners argued that because the SPV and another Halifax subsidiary was involved only for tax avoidance reasons, the Halifax Group ought only to recover VAT at the direct rate of 5 per cent(£350,000).

"This could become a problem for large businesses because if they intend to carry out a multi-million-pound development; VAT accounts for a big chunk of money to lose as an absolute cost to the business," Mr Ridsdale explained.

Any ECJ decision in favour of the abuse of rights doctrine would first have to be implemented by UK courts, before it could translate into change for big businesses and their tax advisors.

If Halifax's appeal is rejected, as the consensus among serious legal commentators suggests, HMRC will rule that when a big business purchases a property it does not need to run the transaction through two or three subsidiary companies.

The taxman will declare the only reason the enterprise has pursued the action is to get the VAT back, therefore deeming the process abusive and resulting in VAT claims being denied.

The worry for serial entrepreneurs and large businesses comes as David Ramsden, a Treasury official, has declared the UK tax gap is almost 13 per cent of the expected VAT take; a finding that he hinted proves a need for vigorous measures to tackle VAT avoidance.

"When you think how much VAT we collect, that is a very significant amount of revenue that we are losing, and of that amount a significant proportion is through avoidance activity," Ramsden said.

Treasury figures inform that the estimated VAT tax gap for 2005 is just under £10billion.

Mr Ridsdale concluded: "In the absence of any economic justification for structuring transactions in a particular way, tax avoidance is essentially deemed to exist - even though the enterprise might not have had this in mind, so larger businesses will have to think very carefully when they carry out a transaction exactly how far they should go [in claiming back VAT]."

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