The cases were RBS Deutschland Holdings GmbH (C-277/09) and Weald Leasing Ltd (C-103/09).

 

The case of RBS, put simply, was that differences in the implementation of EU VAT rules as between the UK and Germany led to a transaction being taxed in neither state. The UK challenged the “exploitation” of that fact as an abuse of rights, and declined related input tax recovery to the appellant. The ECJ could see no basis for deciding that business should be held accountable for a disagreement between two member states as to the application of these rules. The loophole, if such it was, had been left glaringly in place by the two member states. That a business decided to walk through that loophole is hardly surprising and hardly abusive. This all seems so obvious as to beg the question why HMRC had ever argued the point. Of course, it must be grievous to them that the disagreement in treatment between them and Germany could not be remedied in this way. The telecoms case of IDT had previously suggested it might be, but that has long been a contentious decision. It is not the place here to dissect any differences or parallels between RBS and IDT, but beyond the encouragement the earlier case may have given to HMRC’s proposition, the prospects of the ECJ agreeing that an avoidable difference of interpretation between two member states should not lead to its obvious consequences were, to say the least, bleak.

 

The case of Weald is if anything more interesting in a general way. Reduced to its essentials it was about using leasing to spread a VAT cost for an exempt business. Is this, per se, an abuse? Or is it only an abuse when combined with suppression of lease supply values whereby an ultimate tax saving, beyond the time value of money, might arise? Common sense suggests that only the latter ought arguably to be an abuse. Whilst a business might well not enter into a lease were it not for the VAT spreading effect, nonetheless, this is simply one of the several good reasons for leasing, and leases are a normal fact of commercial life. There is nothing contrived about using them, even where captive lease companies are concerned.

 

The ECJ agrees. Whilst it has condemned structures which suppress lease values in order to achieve an under-taxation of the supply, it has accepted leases per se as not being abusive. Weald in itself will not welcome the result, because their scheme involved suppressed values, but the important thing for everyone else is that HMRC’s notion that leases are evil has been halted in its tracks. This means that a business may set up a separate company to purchase a major (non-real estate) asset, lease it to the business with VAT on the lease, and then reclaim the capital VAT. Whether it would be wise to do that I shall consider a little below.

 

This prompts me to raise the question of the “anti-avoidance” provisions in Schedule 10, VATA, concerning the option to tax. This switches off the option for land supplies between related parties, or parties agreeing certain funding arrangements, where the tenant is unable to recover 80% of the relevant input tax. I refer to this as “anti-avoidance” because that is how the legislation refers to it (though only in the title, and not as part of the legislation in any effective capacity). This makes clear the policy underpinning their introduction. The rules have their genesis in the view that leasing structures are avoidance. 

 

Now, it has to be admitted that there might be shades or degrees of avoidance. There is avoidance that could be called an “abuse”, and there are, by contrast, milder forms of avoidance. Perhaps the UK government had milder avoidance in mind when it introduced this legislation. I would have thought that such milder avoidance would occupy the area more often referred to as “mitigation”. However, HMRC ought to note the point made only today by the ECJ at para 27: “Where the taxable person chooses one of two transactions, the Sixth Directive does not require him to choose the one which involves paying the higher amount of VAT. On the contrary, taxpayers may choose to structure their business so as to limit their tax liability”.

 

So, does this mean that the legitimacy of the schedule 10 provisions in suspending the effect of the option is now called into question? On one level it is not. The Directive allows member states to introduce an option to tax over land supplies with whatever restrictions it wishes to introduce. The member state does not have to justify the purpose of the restrictions. But legitimacy goes wider than having the vires to do it. It deals with such matters as rationality and reason. Now that the ECJ has made clear that leasing structures which no more than spread VAT costs are entirely legitimate, maintaining ostensible “anti-avoidance legislation” just because there is nothing standing in the way of the legislators is no longer in itself legitimate. Were it not for the significant complexity and (often) unfairness of these provisions, we might not be too concerned. But they are a pointless blight on the option to tax rules. The government is currently seeking de-regulation and simplicity. Well, here is the place to start, and to start this very day.

 

That leads me on to the final observation, which I shall start by pointing out that many analysts have been saying all along that, in the long term, HMRC may well have received greater revenues without the option to tax “anti-avoidance” rules as long as they had had robust rules relating to transfer pricing in their stead. It was only the impact on revenues in the very short term which caused them to take the opposite view. And the same basic principle applies, but in mirror image, to tax payers. If you are going to pay the same amount of VAT, under a lease, over a period of time, then you have to weigh up whether it is worth doing. If HMRC is now going to hunt down goods leasing deals where they perceive a possible argument in their favour based on transfer price, and if that also involves arm’s length transfer pricing, with added commercial profit, then a leasing agreement may not prove as effective as one may imagine. 

 

In particular, imagine you had bought an expensive piece of kit, to lease to yourself, while the VAT rate was 15%, but the rate on your lease is now rising to 20%, with, who knows, a possible increase to 22% in, say 2012/13. Would that have been helpful? Again, it boils down to common sense.