In our last issue of Tax Insight we noted the threat by Customs & Excise to rewrite the rules on VAT groups. A recent judgment of the House of Lords suggests that Customs & Excise may be worrying unnecessarily. The existing law, as applied in an increasingly flexible manner by the Courts, is itself a powerful tool.
The Thorn case involved manipulation of the VAT rules relating both to the time of supply and to groups, in order to obtain an artificial VAT advantage. The two companies involved in this case were both in a VAT group. One of them, Thorn Materials, agreed to sell goods to another company in the group. 90% of the price was paid immediately and Thorn Materials lent the amount of that payment to the other company. Seven days later Thorn Materials left the VAT group and some time after that the delivery of goods was made to the other company and the balance of the price was paid.
Thorn Materials contended that VAT was only due to Customs in respect of the 10% balance paid to it on the date of delivery. It argued that the time of supply for the rest of the price was the date on which payment had been made. As it had been inside the VAT group at that time, the supply should be disregarded as an intra-group supply.
Given that the overriding motivation of this arrangement was to avoid tax, it is hardly surprising that Customs did not agree; nor, on their reading of the legislation, did the majority of the House of Lords. It held that because the prepayment fell to be disregarded under the VAT group rules, no liability to VAT could at that date attach to Thorn Materials, and the tax point for the supply could not therefore be advanced to that date. Accordingly, the general rules as to time of supply applied, so that the supply took place on the date of delivery and Thorn Materials was liable for VAT on the whole of the purchase price.
Comment
Although the majority in favour of Customs was four to one, a powerful dissenting judgment was delivered by Lord Hoffmann in which he argued that, on a strict interpretation of the legislation, the approach of the taxpayers was correct. Given the greater flexibility of construction employed by the majority in the House of Lords, this is a further example of the Courts' growing willingness to strike down avoidance schemes by a purposive interpretation of existing legislation. This development in the jurisprudence of the courts will surely be the government's most effective weapon in its war on tax avoidance, and calls into question the need for much threatened anti-avoidance legislation.
For further information please contact Mark Simpson, e-mail: Click Contact Link , 2 Park Lane, Leeds LS3 1ES, UK, Tel: + 44 113 284 7000
This article was first published in the Autumn 1998 Hammond Suddards Tax Newsletter Update
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
The Thorn case involved manipulation of the VAT rules relating both to the time of supply and to groups, in order to obtain an artificial VAT advantage. The two companies involved in this case were both in a VAT group. One of them, Thorn Materials, agreed to sell goods to another company in the group. 90% of the price was paid immediately and Thorn Materials lent the amount of that payment to the other company. Seven days later Thorn Materials left the VAT group and some time after that the delivery of goods was made to the other company and the balance of the price was paid.
Thorn Materials contended that VAT was only due to Customs in respect of the 10% balance paid to it on the date of delivery. It argued that the time of supply for the rest of the price was the date on which payment had been made. As it had been inside the VAT group at that time, the supply should be disregarded as an intra-group supply.
Given that the overriding motivation of this arrangement was to avoid tax, it is hardly surprising that Customs did not agree; nor, on their reading of the legislation, did the majority of the House of Lords. It held that because the prepayment fell to be disregarded under the VAT group rules, no liability to VAT could at that date attach to Thorn Materials, and the tax point for the supply could not therefore be advanced to that date. Accordingly, the general rules as to time of supply applied, so that the supply took place on the date of delivery and Thorn Materials was liable for VAT on the whole of the purchase price.
Comment
Although the majority in favour of Customs was four to one, a powerful dissenting judgment was delivered by Lord Hoffmann in which he argued that, on a strict interpretation of the legislation, the approach of the taxpayers was correct. Given the greater flexibility of construction employed by the majority in the House of Lords, this is a further example of the Courts' growing willingness to strike down avoidance schemes by a purposive interpretation of existing legislation. This development in the jurisprudence of the courts will surely be the government's most effective weapon in its war on tax avoidance, and calls into question the need for much threatened anti-avoidance legislation.
For further information please contact Mark Simpson, e-mail: Click Contact Link , 2 Park Lane, Leeds LS3 1ES, UK, Tel: + 44 113 284 7000
This article was first published in the Autumn 1998 Hammond Suddards Tax Newsletter Update
The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.
