The University of Huddersfield has lost its case against HMRC at the Upper Tribunal (UT) over a claim that the use of a complex leasing scheme to claim a £600,000 VAT refund amounted to tax avoidance, in a reversal of an earlier decision by the First Tier Tribunal (FTT)
The case ([2014] UKUT 0438 (TCC)) related to the university seeking to recover the VAT on the costs of refurbishing leasehold property. As a supplier of education, much of its activity was exempt from VAT, so it would only have been able to recover a small proportion of VAT on construction costs.
To mitigate this, the University of Huddersfield set up a complex leasing scheme which involved a circular and self-cancelling lease and leaseback with a trust it had set up in order to reduce the VAT costs of refurbishing university property. The scheme deferred the VAT charge over the life of the leases, but it was intended to create an absolute saving by collapsing the leases early. The leases collapsed in 2004.
An earlier FTT backed the university’s position, but the UT has now found in HMRC’s favour. It found that the scheme was an artificial attempt to create a taxable supply for no other reason than to enable the university to claim VAT on its refurbishment costs. The UT decided that the scheme was abusive and, as a result, the lease and leaseback transactions should be ignored for VAT purposes.
HMRC said the case illustrated its use of the ‘Halifax abuse’ principle, which arose from a landmark legal ruling which recognised the EU principle of ‘abuse of rights’ as applied to VAT. This says that if an if an arrangement seeks to secure a tax advantage which, despite meeting the letter of the law, is contrary to the purpose of the law, then it can be judged to be an ‘abuse of rights’ and disregarded for VAT purposes.
Jennie Granger, director general enforcement and compliance, HMRC, said: ‘This case offers further evidence that HMRC pursues those who avoid tax and won’t hesitate to litigate if a satisfactory settlement can’t be reached through discussion.
‘The Upper Tribunal’s ruling also backs a key argument used by HMRC to tackle abusive VAT avoidance. Anyone tempted by avoidance schemes should think long and hard because we have a great record in defeating them in the courts.’
The ruling was made on 24 July at the Upper Tribunal at the Royal Courts of Justice.
