The Commissioners for HMRC v Newey (t/a Ocean Finance)

The basic issue on this appeal is whether the EU law doctrine of abuse of law applies in circumstances where the respondent taxpayer, Mr Newey, who had previously carried on a successful loan-broking business in partnership in the United Kingdom under the trading name of “Ocean Finance”, took steps to incorporate and restructure the business in Jersey, outside the EU and outside the normal territorial scope of value added tax (“VAT”).

The partnership’s business had never been registered for VAT, because the only supplies which it made in the UK were of exempt financial services. The business nevertheless bore a substantial burden of VAT on supplies of services and goods made to it for the purposes of the business, including in particular supplies of advertising services which were targeted at potential customers for loans. Because Ocean Finance carried on its business as an “exempt trader”, the supplies which it made to its customers (who were third party lenders) generated no output tax against which the tax which it paid on supplies attributable to its business could be set off as input tax. Accordingly, the tax which Ocean Finance paid to its own suppliers, notably in respect of advertising, represented an irrecoverable cost of its business.

It is common ground that the sole reason why Mr Newey took steps to incorporate and restructure the business of Ocean Finance in Jersey was to eliminate this burden of irrecoverable input tax. Under the new arrangements, which were put in place by him on the advice and with the assistance of a firm of chartered accountants (Moore Stephens), the business was (at least ostensibly) then carried on by the Jersey-registered company and its directors (who deliberately did not include Mr Newey), and the necessary advertising services were supplied to that company by another Jersey company, the intention being that no VAT could be chargeable in respect of those services because they would fall outside the scope of the relevant place of supply rules. In other respects, however, the business continued to operate on the ground much as before. The loan-broking services were still provided to third party lenders in the UK, in respect of loans made to UK-resident customers recruited through advertising which was placed only in the UK. The work of processing loan applications was still carried out by Mr Newey and his team at their UK premises in Staffordshire, although these services were now provided by Mr Newey to his Jersey company under a Services Agreement. The business also continued to trade under the name of Ocean Finance, which Mr Newey permitted the company to use.

Against this background, the Commissioners for Her Majesty’s Revenue and Customs (“HMRC”) eventually assessed Mr Newey to VAT for the period from 1 July 2002 to 31 December 2004 in the sum £10,707,075. This tax was said to be due in respect of advertising services provided by the Jersey-based advertising company (Wallace Barnaby & Associates Ltd, “Wallace Barnaby”) to the Jersey company which carried on the Ocean Finance business (Alabaster (CI) Ltd, “Alabaster”). HMRC sought to justify the assessment on two alternative grounds. First, they argued that the position as a matter of VAT law was that Mr Newey, not Alabaster, was the supplier of the loan-broking services, with the consequence that the advertising services had to be treated as supplied to him. On that footing, a reverse charge would arise on Mr Newey under section 8 (1) of the Value Added Tax Act 1994 (“VATA 1994”). This charge would be attributable to exempt supplies of loan-broking services made by him in the UK, and thus not recoverable as input tax. Alternatively, if the supplies of advertising services were made to Alabaster and not to Mr Newey, the scheme viewed as a whole constituted an abuse of law under EU law, which should be countered by treating Mr Newey as receiving supplies of advertising services and using them to make exempt supplies of loan-broking services in the UK.

Mr Newey appealed, and in due course his appeal was heard by the Tax Chamber of the First-tier Tribunal (Judge Berner and Mrs Neill) (“the FTT”) over 5 days in February 2010. By its decision released on 23 April 2010 (“the FTT Decision”), the FTT allowed Mr Newey’s appeal. The FTT held, in short, that on a proper consideration of all the facts it was Alabaster, not Mr Newey, which made the loan-broking supplies and was the recipient of the supplies of advertising services; and that the doctrine of abuse of law had no application, because although the essential aim of the scheme had been to obtain a tax advantage, the establishment of Alabaster in Jersey was not itself abusive unless its functions or activities were such as to be contrary to the purposes of the VAT legislation, and on the facts that test was not satisfied. In reaching this conclusion, the FTT applied the law on abuse of law in accordance with its understanding of the principles laid down by the Court of Justice of the European Communities (“the CJEU”) in the Halifax case (Case C-255/02, Halifax Plc and others v Customs and Excise Commissioners, ECR I-1609, [2006] Ch 387, [2006] STC 919) and by the Court of Appeal in WHA Ltd v Revenue and Customs Commissioners [2007] EWCA Civ 728, [2007] STC 1695.

HMRC then appealed to the Tax and Chancery Chamber of the Upper Tribunal, but also made an application (to which Mr Newey consented) for a reference to be made to the CJEU for a preliminary ruling. An order for reference was accordingly made on 13 December 2011, seeking guidance from the CJEU on the correct approach to the interpretation of a “supply” for the purposes of the Sixth Directive, and in particular (a) the extent to which national courts are required to attach significance to a contractual analysis in determining who makes a supply of services for VAT purposes, and (b) if the correct analysis under the Sixth Directive is that a person such as Alabaster is the supplier of loan-broking services and the recipient of advertising services, whether the scheme entered into by Mr Newey and Alabaster with the sole aim of obtaining a tax advantage was contrary to the scheme and purpose of the Sixth Directive in accordance with the principle of abuse of law: see the order for reference at paragraph 90, and the six specific questions set out in paragraph 91.

The Third Chamber of the CJEU delivered its judgment on 20 June 2013, having decided to proceed to judgment without an opinion of the Advocate General. I will need to return later to the detailed reasoning of the Court, but for now I will quote the dispositif in which the Court formulated its conclusion on the first four of the questions referred (which it had considered together):

“Contractual terms, even though they constitute a factor to be taken into consideration, are not decisive for the purposes of identifying the supplier and the recipient of a “supply of services” within the meaning of arts 2(1) and 6(1) of [the Sixth Directive]. They may in particular be disregarded if it becomes apparent that they do not reflect economic and commercial reality, but constitute a wholly artificial arrangement which does not reflect economic reality and was set up with the sole aim of obtaining a tax advantage, which it is for the national court to determine.”

With the benefit of this guidance, the resumed hearing of HMRC’s appeal took place before the Upper Tribunal (Warren J) on 4 and 5 November 2014. By its decision released on 2 June 2015 (“the UT Decision”), the appeal was dismissed. The UT Decision runs to 260 paragraphs, and is not easily summarised. In outline, however, the Upper Tribunal expressed some criticisms of the reasoning by which the FTT had reached its conclusion on one limb of the Halifax test, but nevertheless concluded that the FTT had been entitled to reach the conclusions which it did on the basis of the facts which it found. The Upper Tribunal rejected HMRC’s case that the Alabaster arrangements were “wholly artificial” and thus contrary to the purpose of the Sixth Directive. In a key passage of its discussion of the abuse issue, the Upper Tribunal said:

“244.

…Although [the FTT] did not say so in so many words, they considered that the Alabaster arrangements did reflect an economic and commercial reality which did not produce a result contrary to the purpose of the Sixth Directive. Had they expressed their conclusion in the language of the CJEU Judgment, it is clear, in my view, that they would have concluded that the arrangements were not wholly artificial arrangements which did not reflect economic and commercial reality. It is not just that I consider this is what they would have said: I perceive what they actually said as inconsistent with a contrary conclusion.

245.

Can the Tribunal’s conclusion on abuse nonetheless be overturned on the basis of the errors which HMRC allege? In this context, the question is not whether I would have reached the same conclusion but whether the evaluation of the Tribunal in the light of the unchallenged findings of primary fact displays an error of law.

246.

Although HMRC have demonstrated a number of areas where the Tribunal have not expressly dealt with factors on which HMRC now rely and where the Tribunal has attached weight which HMRC consider to be wrong, I do not consider that the criticisms are sufficient for me to say that the Tribunal has erred in law in reaching its conclusions.”

HMRC now appeal to this court, on four grounds directed to the issue of whether the scheme as a whole is an abuse of law. HMRC now accept that “unless the scheme can be characterised as an abuse of law, these supplies were made in accordance with the contractual arrangements entered into by Alabaster and the loan brokers and advertising agency” (paragraph 3 of the grounds of appeal dated 17 August 2015). The Upper Tribunal itself granted permission to appeal on the main ground (ground 1), because Warren J considered it arguable that he had adopted the wrong approach to the FTT’s reasoning in view of the principles stated by the Supreme Court in the Pendragon case (Pendragon Plc and others v Revenue and Customs Commissioners [2015] UKSC 37, [2015] STC 1825), and that if he had conducted his own evaluation of the facts, rather than merely considering whether it was open to the FTT to conclude as it did, he might have held that this was a case of abuse of law. The Upper Tribunal refused permission to appeal on the other three grounds advanced by HMRC, but permission was subsequently granted by David Richards LJ on 27 January 2016.

An appeal from the Upper Tribunal to this court, like an appeal from the FTT to the Upper Tribunal, lies only on questions of law: see sections 13(1) and 11(1) of the Tribunals, Courts and Enforcement Act 2007 (“TCEA 2007”). We must therefore keep in mind the guidance given by Lord Carnwath (with the agreement of the other members of the court) in Pendragon at [50] to [51], which includes the following:

“50.

The difficult concept of “abuse of law” as developed by the European Court, though not strictly one of statutory construction, is a general principle of central importance to the operation of the VAT scheme. It matters little whether it is described as involving an issue of mixed law and fact, or of the evaluation of facts in accordance with legal principle. However it is described, it was clearly one which was particularly well suited to detailed consideration by the Upper Tribunal, with a view to giving guidance for future cases. Having found errors of approach in the consideration by the First-tier Tribunal, it was appropriate for them to exercise their power to remake the decision, making such factual and legal judgments as were necessary for the purpose, thereby giving full scope for detailed discussion of the principle and its practical application. Although no doubt paying respect to the factual findings of the First-tier Tribunal, they were not bound by them…

51.

Against this background, it was unhelpful, in my view for the Court of Appeal to identify the main issue as to whether the Upper Tribunal went beyond its proper appellate role. The appeal to the Court of Appeal (under s 13) was from the decision of the Upper Tribunal, not from the First-tier, and their function was to determine whether the Upper Tribunal had erred in law. That was best approached by looking primarily at the merits of the Upper Tribunal’s reasoning in its own terms, rather than by reference to their evaluation of the First-tier’s decision…The Upper Tribunal reached a carefully reasoned conclusion on law and fact. The task of the Court of Appeal was to determine whether that conclusion disclosed any error of law.”

Without detracting in any way from that guidance, it is in my judgment also important to remember that the FTT is the primary tribunal of fact, in the sense that it heard and evaluated the evidence of the witnesses and made findings which cannot normally be disturbed in the absence of an error of law (that is to say, on the familiar principles stated by the House of Lords in Edwards (Inspector of Taxes) v Bairstow [1956] AC 14).

For the purposes of this appeal, it is unnecessary to set out the facts in exhaustive detail. I gratefully take much of the account which follows from the UT Decision at [7] to [18]. A fuller account may be found in the FTT Decision at [6] to [53], much of which is reflected in the order for reference to the CJEU at paragraphs 30 to 84. The FTT heard oral evidence from Mr Newey and from Dermot Boylan, a partner in Moore Stephens, Jersey who had been a director of Alabaster since December 2000. Both Mr Newey and Mr Boylan were cross-examined at considerable length by leading counsel then appearing for HMRC, Mr Christopher Vajda QC.

From May 1991 until January 1997, Mr Newey had been in business as a loan broker in partnership with a Mr Horton in Staffordshire, where they had a processing centre. From November 1991, they traded as Ocean Finance providing services as licensed credit brokers, and attained a significant market share within a relatively short period. After seeing an advertisement for loans, individuals who wished to borrow would call the Ocean Finance processing centre, details would be taken and a loan application processed. All of the relevant lenders were in the UK, as were all the borrowers and potential borrowers. The partnership was not registered for VAT as it was making only exempt supplies. It therefore incurred irrecoverable VAT on advertising and other supplies received for the purposes of the business.

Mr Newey apparently became aware that some of Ocean Finance’s competitors were obtaining advertising services free of VAT. He sought advice from Moore Stephens, and following that advice Ocean Finance carried out a restructuring with effect from 1 March 1996 the essential element of which was the creation of Lichfield (CI) Ltd (“Lichfield”) in Jersey. The salient features of the restructuring were as follows:

The FTT found that Mr Newey’s “sole reason for implementing these arrangements was to avoid VAT”: see the FTT Decision at [11].

In January 1997, Mr Newey bought out Mr Horton’s interest in the business. The loan-processing part of the business continued to operate from Lichfield in Staffordshire, before relocating to Tamworth in April 2002. Later in 1997, Lichfield ceased trading as a loan broker, and with the assistance of Moore Stephens, Alabaster was formed and registered in Jersey on 15 May 1997. Mr Newey has at all material times been the sole beneficial shareholder of Alabaster. In order to provide Alabaster with working capital, Mr Newey made loans to it totalling £880,375 during its initial accounting period to 30 September 1998. These loans were interest-free and unsecured. They were repaid in full by 30 September 1999, the repayments being financed out of Alabaster’s own cash flow from its business. Alabaster never had any other form of loan finance.

Alabaster entered into agreements with various UK lenders, First Island Properties Ltd, Abacus and Mr Newey which were substantially similar to those which Lichfield had made. Alabaster also obtained a licence from the Office of Fair Trading, licensing it under the Consumer Credit Act 1974 to carry on its consumer credit and brokerage business under its own name or the name of Ocean Finance. Abacus was later succeeded by Wallace Barnaby with effect from late November 2001.

On 2 October 1997, Alabaster entered into an agreement with First Island Properties Ltd under which it was to be provided with a private office with a floor area of not less than 50 square feet, a desk, chair, filing facilities, telephone/fax lines and a networked work station with printer, the use of an unspecified room 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.

Pursuant to a services agreement made on the same day (“the Services Agreement”), Mr Newey agreed to:

Under Alabaster’s constitution and the law in force in Jersey, its directors were responsible for managing and exercising the powers of the company. Mr Newey played no part in its management. The directors, of whom there were always at least four, were provided or recruited locally by Moore Stephens, Jersey. All of the directors were Jersey residents. The FTT found that none of them had any direct experience of loan-broking.

By a further agreement with Moore Stephens, Jersey, also 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 staff employed by Mr Newey at his Staffordshire processing centre performed the services which I have described above. They alone had contact with potential borrowers, they undertook all checks on applications and removed any unsuitable ones, and in each case they presented the “final recommendation” to Alabaster for approval. These recommendations were faxed on lists to the offices in Jersey, and approved by the directors. The directors took it in turns to consider the recommendations, and, if appropriate, to approve them (which in the event they always did).

Abacus, and later Wallace Barnaby, had a contract with a UK-based agency called Ekay Advertising which dealt directly with the UK media, negotiated pricing and made recommendations about which media outlets advertisements should be placed with. The FTT said, at [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 £22m. 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 [Mr Newey]. In the latter stages of its operations Alabaster was authorising and approving in excess of £400,000 of advertising spend per week.”

The FTT then described the involvement of Mr Newey in the advertising process, finding at [35] that it was consistent with the services performed under the Services Agreement, and with Mr Newey’s own interest (through having a right of approval of advertisements) in protecting his trade name and reputation. The FTT expressly rejected Mr Vajda’s submission that Ekay’s client in terms of obtaining instructions was Mr Newey. The directors of Alabaster would meet each Friday to discuss the placing of advertisements for the following week, based on a recommendation from Wallace Barnaby (which was in turn based on a recommendation from Ekay, following Mr Newey’s discussions with Ekay). No recommendation from Wallace Barnaby was ever rejected.

The FTT added, at [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 [Mr Newey]. 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.”

The FTT made further important findings of fact, of an evaluative nature, at [50] to [53] of the FTT Decision, from which I quote the following extracts:

“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…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 [Mr Newey] 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 [Mr Newey] 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.

…

52.

It is common ground that [Mr Newey’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 [a member of Alabaster’s staff]. 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 [Mr Newey] 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 [Mr Newey] 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 [offer authority requests], 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 [Mr Newey]. It relied on [Mr Newey] 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.”

The relevant EU legislation in force at the time of the matters in dispute was the Sixth Directive (Directive 77/388/EEC), so I shall refer to the provisions of that Directive rather than the Principal VAT Directive which came into force on 1 January 2007.

Article 2 provides that:

“The following shall be subject to value added tax:

1 the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;

…”

By virtue of Article 3(2), the “territory of the country” is defined as the area of application of the Treaty establishing the European Economic Community, as defined in respect of each Member State in Article 227. That definition excludes the Channel Islands. The territorial application of VAT is therefore co-extensive with the area of application of the EEC Treaty. The tax does not apply to supplies made in other (“third”) countries.

The place where a supply of services takes place is dictated by Article 9. The general rule, in Article 9(1), is that the place of supply of a service is “deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied”, or in the absence of such a place, “the place where he has his permanent address or usually resides.” By way of exception to this general rule, however, Article 9(2)(e) provides that the place where certain specified services are supplied, “when performed for customers established outside the Community or for taxable persons established in the Community but not in the same country as the supplier, shall be the place where the customer has established his business or has a fixed establishment to which the service is supplied…”. One of the specified services is “advertising services”. Another is “banking, financial and insurance transactions”.

It follows from the above provisions of Article 9(2)(e) that the place of supply of the advertising services provided to Alabaster by Wallace Barnaby was Jersey, and thus outside the scope of VAT, even though the services consisted in the provision by Wallace Barnaby of advertisements in the UK to potential UK customers of Alabaster’s credit-broking business.

By way of further qualification of the general rule, however, Article 9(3) then provides that:

“In order to avoid double taxation, non-taxation or the distortion of competition, the Member States may, with regard to the supply of services referred to in paragraph 2(e),…consider:

…

(b)

the place of supply of services, which under this Article would be situated outside the Community, as being within the territory of the country where the effective use and enjoyment of the services take place within the territory of the country.”

Accordingly, the United Kingdom could in principle have taken advantage of this derogation in order to provide that the place of supply of advertising services such as those provided by Wallace Barnaby to Alabaster was the UK, that being the country where the effective use and enjoyment of the advertising took place. It is common ground that the United Kingdom did not take advantage of this opportunity, and each side claims that the omission has some relevance. Mr Newey says that if the UK considered arrangements such as the Alabaster arrangements to be abusive, it could have solved the problem by introducing legislation to treat the relevant advertising services as provided in the UK, and they would then have been subject to VAT under Article 2 as taxable supplies made to Alabaster. HMRC acknowledge that this was not done, but rely on the wording of Article 9(3) as a recognition that the purposes of the place of supply rules can extend to supplies made in third countries, where the effective use and enjoyment of the services takes place within the EU.

Section 4 of VATA 1994 provides that:

“(1)

VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

(2)

A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.”

Section 5(2) provides, subject to immaterial exceptions, that:

“(a)“supply” in this Act includes all forms of supply, but not anything done otherwise than for consideration;

(b)

anything which is not a supply of goods but is done for a consideration…is a supply of services.”

Section 7(10) then provides that:

“A supply of services shall be treated as made –

(a)

in the United Kingdom if the supplier belongs in the United Kingdom; and

(b)

in another country (and not in the United Kingdom) if the supplier belongs in that other country.”

Mr Newey points out that HMRC have never alleged that Alabaster “belongs” in the UK. The detailed rules governing the place where a supplier or recipient of services belongs are contained in section 9. The basic rule is that the supplier of services shall be treated as belonging in a country if he has there a business establishment or some other fixed establishment, and no such establishment elsewhere: see subsection (2)(a). By virtue of subsection (5)(a), for the purposes of section 9 (but not for any other purposes) a person carrying on a business through a branch or agency in any country shall be treated as having a business establishment there. Again, Mr Newey makes the point that HMRC have never alleged that Alabaster carried on its business through a branch or agency in the UK.

Section 8 of VATA 1994 imposes a reverse charge on supplies received from abroad, as follows:

“(1)

Subject to subsection (3) below, where relevant services are –

(a)

supplied by a person who belongs in a country other that the United Kingdom, and

(b)

received by a person (“the recipient”) who belongs in the United Kingdom for the purposes of any business carried on by him,

then all the same consequences shall follow under this Act (and particularly so much as charges VAT on a supply and entitles a taxable person to credit for input tax) as if the recipient had himself supplied the services in the United Kingdom in the course or the furtherance of his business, and that supply were a taxable supply.

(2)

In this section “relevant services” means services of any of the descriptions specified in Schedule 5, not being services within any of the descriptions specified in Schedule 9 [i.e. exempt services].

(3)

Supplies which are treated as made by the recipient under subsection (1) above are not to be taken into account as supplies made by him when determining any allowance of input tax in his case under section 26(1). ”

The services specified in Schedule 5 include, in paragraph 2, “advertising services”.

It follows that Mr Newey would have been liable to a reverse charge under section 8 if the correct analysis were that the advertising services provided by Wallace Barnaby (a person belonging in Jersey) had been supplied to him (a person belonging in the UK) rather than to Alabaster. It also follows, as I have explained, that even if the services were correctly characterised as supplied to Alabaster, HMRC could nevertheless have assessed them to tax if the UK had introduced legislation to take advantage of the derogation in Article 9(3) of the Sixth Directive.

It has long been established that a supply of services (such as advertising) is effected “for consideration”, within the meaning of Article 2(1) of the Sixth Directive, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, and the remuneration received by the provider of the service constitutes the value actually given in return for the service supplied to the recipient: see the judgment of the CJEU in the present case at paragraph 40, referring to Case C-270/09, MacDonald Resorts Ltd v Revenue and Customs Commissioners [2010] ECR I-13179, [2011] STC 412, at paragraph 16 and the case law there cited. It follows that the concept of a supply of services is “objective in nature and applies without regard to the purpose or results of the transactions concerned and without it being necessary for the tax authorities to carry out enquiries to determine the intention of the taxable person”: ibid, at paragraph 41.

It does not, however, follow from the requirement for there to be a “legal relationship” between the supplier and the recipient of a supply of services that the relationship must be contractual, or (if it is) that the terms of the contract are necessarily conclusive. As the CJEU put it (again in the present case) at paragraph 42:

“As regards in particular the importance of contractual terms in categorising a transaction as a taxable transaction, it is necessary to bear in mind the case law of the court according to which consideration of economic and commercial realities is a fundamental criterion for the application of the common system of VAT…”.

The Court cited as authority for this proposition Joined Cases C-53/09 and C-55/09, Revenue and Customs Commissioners v Loyalty Management UK Ltd, Baxi Group Ltd v Revenue and Customs Commissioners [2010] ECR I-9187, [2010] STC 2651, at paragraphs 39 and 40.

Thus the contractual arrangements agreed between the parties cannot, by themselves, be determinative of the VAT analysis, although they will usually provide the starting point, and are likely to be conclusive unless shown to be inconsistent with underlying economic and commercial realities: see WHA Ltd v Revenue & Customs Commissioners [2013] UKSC 24, [2013] STC 943, at [27] per Lord Reed JSC, and Revenue & Customs Commissioners v Airtours Holidays Transport Ltd [2016] UKSC 21, [2016] STC 1509, at [47] per Lord Neuberger PSC.

In the Halifax case, the Grand Chamber of the CJEU decided for the first time that the EU doctrine of abuse of law applied to VAT. The question arose in the context of an elaborate and artificial scheme devised by Halifax Plc, a bank, which wished to construct call centres at four sites which it owned in the UK. If Halifax contracted with a developer itself, it would suffer largely irrecoverable input tax on the construction costs, because the supplies which Halifax made were mostly exempt. The transactions involved two other group companies, and a series of loans, leases, assignments and sub-leases which (on a rehearing) the VAT Tribunal found were entered into with the sole purpose of avoiding VAT and had no independent business purpose. The Tribunal then made a reference to the CJEU, asking whether the relevant transactions qualified for VAT purposes as supplies made by or to the participators in the scheme, and whether the doctrine of abuse of law operated so as to disallow the claimed VAT consequences.

In answer to the first question, the Court ruled (at paragraphs 55 to 60 of its judgment) that the transactions did constitute supplies of goods or services and an economic activity within the meaning of the Sixth Directive, provided that they satisfied the objective criteria on which those concepts are based, and that it was “entirely irrelevant” for those purposes whether a given transaction is carried out for the sole purpose of obtaining a tax advantage.

In relation to the second question, the Court held, as I have said, that the “principle of prohibiting abusive practices also applies to the sphere of VAT” (paragraph 70 of the judgment). The Court also recognised that the prevention of possible tax evasion, avoidance and abuse was “an objective recognised and encouraged by the Sixth Directive” (paragraph 71). The Court continued (omitting citations):

“72.

However, as the Court has held on numerous occasions, Community legislation must be certain and its application foreseeable by those subject to it… That 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…

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… 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.

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 such action constituting such an abusive practice has taken place in the case before it…”

Paragraphs 74 and 75 of the above passage lay down the two tests which have to be satisfied if an abusive practice is to be found to exist. In short, (a) application of the legislative provisions which are prima facie applicable must result in the accrual of a tax advantage which would be contrary to the purpose of those provisions, and (b) it must also be objectively apparent that the essential aim of the transactions is to obtain a tax advantage. In the present case, it is now common ground that the second of these tests is satisfied, so the main focus is on the first test.

When considering the purpose of the relevant provisions, it is clearly necessary to keep well in mind the principles of legal certainty (especially in fiscal matters) and taxpayer choice identified by the Court in paragraphs 72 and 73. In particular, the Court expressly recognised that “taxpayers may choose to structure their business so as to limit their tax liability”, and endorsed the observations of Advocate General Poiares Maduro in paragraph 85 of his opinion. In view of that endorsement, I think it is helpful to quote what the Advocate General said in that and the following paragraphs:

“85.

Furthermore, the Court has consistently held, in consonance with the position generally accepted by Member States in the tax domain, that taxpayers may choose to structure their business so as to limit their tax liability. In BLP Group Plc v Customs and Excise Commissioners (Case C-4/94) [1995] STC 424, [1996] 1 WLR 174, the Court ruled 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”. There is no legal obligation to run a business in such a way as to maximise tax revenue for the State. The basic principle is that of the freedom to opt for the least taxed route to conduct business in order to minimise costs. On the other hand, such freedom of choice exists only within the scope of the legal possibilities provided for by the VAT regime. The normative goal of the principle of prohibition of abuse within the VAT system is precisely that of defining the realm of choices that the common VAT rules have left open to taxable persons. Such a definition must take into account the principles of legal certainty and of the protection of taxpayers’ legitimate expectations.

86.

By virtue of those principles, the scope of the Community law interpretative principle prohibiting abuse of the VAT rules must be defined in such a way as not to affect legitimate trade. Such potential negative impact is, however, prevented if the prohibition of abuse is construed as meaning that the right claimed by a taxable person is excluded only when the relevant economic activity carried out has no other objective explanation that to create that claim against the tax authorities and recognition of the right would conflict with the purposes and results envisaged by the relevant provisions of the common system of VAT. Economic activity of that kind, even if not unlawful, deserves no protection from the Community law principles of legal certainty and protection of legitimate expectation because its only likely purpose is that of subverting the aims of the legal system itself.”

At paragraph 93 of his opinion, the Advocate General made the pertinent point that the irrecoverability of input tax attributable to exempt supplies is part of the purpose of the Sixth Directive. As he put it (with his emphasis):

“VAT is, in effect, an indirect general tax on consumption meant to be borne by the individual consumers. Correspondingly the same principle requires that a taxable person must not be entitled to deduct or recover the input VAT paid on supplies received for its exempted transactions. As long as no VAT is charged on the goods or services provided by taxable persons, the Sixth Directive necessarily seeks to prevent them from recovering the corresponding input VAT. This entails the consequence emphasised by the Commission at the hearing that exemption from VAT within the meaning of the Sixth Directive does not mean that the Sixth Directive was intended to free the final consumer completely from every tax burden”.

The leading UK authority on the abuse of law doctrine is the decision of the Supreme Court in Pendragon, which was delivered on 10 June 2015 (eight days after the UT Decision in the present case). The leading judgment was delivered by Lord Sumption JSC, with whom the other four members of the court agreed. In view of the importance of the case, it is necessary to deal with it at some length.

As Lord Sumption explained at [1], the case concerned:

“…an elaborate scheme designed and marketed by KPMG relating to demonstrator cars used by retail distributors for test drives and other internal purposes. In the ordinary course, a car distributor will buy new cars for use as demonstrators, paying VAT on the full amount of the sale price. This will in due course be recoverable as input tax by being set off against the output tax for which the distributor was accountable on its taxable supplies. The object of the KPMG scheme was to ensure that companies in the distributor’s group were able to recover input tax paid on the price of new cars acquired as demonstrators from manufacturers, while avoiding the payment of output tax on the price at which the car was ultimately sold second-hand to a consumer.”

Lord Sumption then explained in more detail how the KPMG scheme was designed to exploit three exceptions to the normal incidence of VAT, and at [3] he set out the five prearranged steps which were adopted by the Pendragon Group. He then began his discussion of the concept of abuse of law, as follows:

“4.

It is common ground that at a purely technical level, the KPMG scheme worked. That is to say, the transactions envisaged at Steps 3 and 4 satisfied all the statutory conditions for exemption from VAT, and the transaction envisaged at Step 5 satisfied all the statutory conditions for the application of the margin scheme. But that is not the end of the matter. Value Added Tax is an EU tax imposed pursuant to successive Directives of the European Union, at the relevant time the Sixth Directive. The Directives are subject to the principle of abuse of law. By virtue of section 2(1) of the European Communities Act 1972 the same principle must apply to domestic legislation implementing the Directives.

5.

Abuse of law is a concept derived from civil law jurisprudence, which is unknown to English common law but has been adopted by the law of the European Union. In its simplest form, it confines the exercise of legal rights to the purpose for which they exist, and precludes their use for a collateral purpose. For present purposes, the expression détournement de droit adopted by some French writers is probably a better description of its content. The application of the principle to tax avoidance schemes calls for a difficult balance to be drawn. It is traditional, at any rate in this jurisdiction, to distinguish between avoidance, which involves the lawful arrangement of a taxpayer’s affairs so as to minimise his tax bill, and evasion, which is an unlawful failure to account for tax due, generally by suppressing or falsifying information. Sophisticated avoidance schemes do not so much undermine this distinction as challenge its usefulness. By artificially reclassifying transactions so as to produce a more favourable tax outcome than commercially comparable “normal” transactions, they frustrate the objective of the taxing provision without necessarily falling foul of its language. The result is arbitrarily to depress tax receipts, producing inequity between taxpayers and potentially distorting competition between firms who are otherwise similarly placed. This gives rise to social costs which are significant and increasingly controversial. On the other hand, legal certainty is an important principle of both English and EU law, particularly when it comes to justifying the financial demands of the state. Artificiality, if it is to be deployed as a workable legal concept, has to be tested against some standard of transactional normality, and the search for such a standard is far from straightforward. Taxpayers faced with a choice between alternative ways of achieving some commercial objective are in principle entitled to select the one with the more tax-efficient statutory outcome. In particular, they are entitled to choose between exempt and taxable transactions in their own financial interest. Like any other tax, VAT is due only in so far as its imposition is authorised by statute. It follows that although the courts may examine the commercial reality of transactions without being unduly hidebound by labels, they do not as a general rule enlarge the scope of a taxing provision by reference to considerations which affect neither the construction of its language nor the characterisation of transactions to which it is said to apply. These dilemmas are particularly acute in the United Kingdom, where the drafting of tax legislation has traditionally depended not on the formulation of general principles but on the definition of taxable occasions with a high degree of specificity.”

Lord Sumption then discussed the Halifax case, citing extensively from the judgment of the Court and the opinion of Advocate General Poiares Maduro, including the passages which I have quoted above. Having done so, Lord Sumption continued as follows:

“10.

Two main difficulties arise where the principle of abuse of law is applied to tax avoidance schemes.

11.

The first arises from the assumption made by the Court of Justice in Halifax that the principle will not apply to what it called “normal commercial operations” (para 69). Subsequent case-law has established that this means those that are normal in the context of the relevant line of business, not necessarily normal for the particular taxpayer: Revenue and Customs Commissioners v Weald Leasing Ltd (Case C-103/09) [2011] STC 596. I do not think that the court can have intended to set up a third distinct test, in addition to the two which are set out in paras 74-75 and repeated in its order. The “normality” of a transaction is relevant to the question posed in the court’s first test, about the “purpose” of the relevant provision of the VAT Directives. “Normal commercial operations” will not as a general rule be regarded as contrary to the purpose of the Directives, since these must be assumed to have been designed to accommodate them. Thus in Weald Leasing the taxpayer’s decision to take equipment on lease from an intermediate company rather than buy it outright was an ordinary commercial transaction. It was not abusive even though it was unusual for the taxpayer in question and was designed to obtain a tax advantage by spreading the liability to tax over a longer period. The choice between leasing and outright purchase was a choice accommodated by the scheme of the VAT legislation. The tax treatment of lease payments being a facility available under the legislation itself, resort to it could not be regarded as contrary to its purpose. For the same reason, a transaction is not abusive merely because it falls within an exception or derogation from ordinary principles of EU law governing the incidence of VAT, such as the right enshrined in the Sixth Directive to deduct input tax generated by transactions in another member state. It follows that the sourcing of goods or services from a country in which the VAT regime is more favourable is not in itself abusive, even though the object and effect is to allow the deduction of input tax without the payment of output tax (Revenue and Customs Commissioners v RBS Deutschland Holding GmbH (Case C-277/09) [2011] STC 345). The reason, as the court explained in that case at paras 51-52, is that this is a choice inherent in a scheme of taxation that is designed to be fiscally neutral as between different member states while allowing for some differences between their implementing laws. Likewise, the conduct of a genuine business activity through a subsidiary incorporated in another member state is not abusive, although the sole reason for the choice is that it has a lower rate of corporation tax: Cadbury-Schweppes Plc v Inland Revenue Commissioners (Case C-196/04) [2006] STC 1908. Precisely the same considerations must apply to a decision to source goods or services from outside the European Union, an option which is inherent in the territorial limits of the EU VAT regime and the assignment of economic relations with third countries to other policies of the Union.

12.

The second difficulty which arises from the application of the principle of abuse of law to tax avoidance is that of concurrent purposes. Tax avoidance schemes are rarely directed exclusively to tax avoidance. It is difficult to conceive of a scheme, other than a fraudulent one, which achieved absolutely nothing but a tax advantage. They are usually directed to achieving a commercial purpose, such as the provision of the call centres in Halifax, in a way which avoids a tax liability that would otherwise be associated with it. The potential for abuse consists in the method chosen to achieve the commercial purpose. In Ministero dell’Economia e delle Finanze v Part Service Srl (Case C-425/06) [2008] STC 3132, the consideration payable by the lessee under a leasing transaction was artificially split between two contracts, one with the lessor and the other with an associated company of the lessor. The latter contract was structured so as to qualify as an exempt financial contract under Italian law, so as to reduce the amount chargeable to VAT. The transactions had a legitimate commercial purpose, namely the leasing of the cars, but the method of achieving that purpose was held to be open to challenge if “the accrual of a tax advantage constitutes the principal aim of the transaction or transactions at issue” (para 45). This conclusion seems to me to do no more than make explicit something which is implicit in the Halifax tests. Identifying the “essential aim” in a case of concurrent fiscal and commercial purposes depends on an objective analysis of the method used to achieve the commercial purpose. As Advocate General Maduro observed in a passage from (para 89) of his opinion which was in terms approved by the court (para 75), the taxpayer’s choices must be “at least to some extent, accounted for by ordinary business aims”. The question is therefore whether the commercial objective is enough to explain the particular features of the contractual arrangements which produce the tax advantage.

13.

These considerations effectively answer a question which is likely to arise in most cases involving prearranged sequences of transactions. Is the relevant “aim” that of the scheme as a whole or of its component parts? The answer is that it may be either or both. Because the principle of abuse of law is, in this context, directed mainly to the method by which a commercial purpose is achieved, it is necessary to analyse each transaction by which it is achieved. Because the purpose of each step will generally be to contribute to the working of the whole scheme, the effect of the whole scheme has also to be considered. In WHA Ltd v Customs and Excise Commissioners [2007] STC 1695, para 22, Lord Neuberger, delivering the leading judgment in the Court of Appeal, rejected the submission that the court was confined to considering the artificiality or purpose of each individual step, since these will commonly be individually unassailable but designed to produce the tax advantage in combination. I agree with this observation.”

The whole of the passage which I have just quoted is important, but at this stage I would single out two points:

Lord Sumption proceeded to apply these principles to the two Halifax tests. In his discussion of the second (essential aim) test, he returned to the relevance of a decision to obtain services from outside the EU at [33], where he said this:

“The selection as the funding bank of an offshore institution which was not a taxable person cannot in itself be regarded as objectionable. It is no part of the policy of the legislation that a party should be restricted in its freedom to select as its commercial partners firms whose place of residence gives dealings with them a tax advantage, even if that is the only reason for their selection. But it is not just the non-resident status of SGJ which enabled the tax advantage to be obtained. The particular method by which SGJ was brought into the chain of contracts, involving successive transactions by which Pendragon navigated its way from one VAT exemption to another, was an unnecessary and artificial way of involving them.”

See too [39], where Lord Sumption said that he did “not consider that the choice of an offshore bank was in itself abusive”, but criticised the reasoning of the FTT in that case because they had “approached their task at too high a level of generality” and had failed to “ask themselves whether Pendragon’s commercial objectives explained the particular features of the transactions which produced the tax advantage.”

Finally, Lord Sumption explained at [41] that, where the Halifax principle is engaged and it is necessary to counter an abuse of law, the transactions have to be redefined “so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice”: see Halifax at [98]. Lord Sumption continued:

“The redefinition is purely notional. Its effect is not to alter retrospectively the terms of the transactions, but simply to entitle the Commissioners, as between themselves and the taxpayer, to treat them for the purpose of assessing VAT as if their abusive features had not been present…The object of any redefinition in this case must be to deprive the taxpayer of the illegitimate advantage of paying VAT only on their profit margin on the resale of the cars to the consumer.”

The authority cited by Lord Sumption for the “purely notional” nature of the redefinition was the decision of the CJEU in the present case at paragraphs 50 to 51: see [61] below.

Since Pendragon, the doctrine of abuse of right has been considered by this court (Lewison and David Richards LJJ) in University of Huddersfield Higher Education Corporation v Revenue and Customs Commissioners [2016] EWCA Civ 440, [2016] STC 1741. This was another case where a supplier of exempt services (in this instance education) entered into a VAT planning scheme designed to enable it to recover input tax (on the refurbishment of two derelict mills which the University had previously bought) most of which would otherwise have been irrecoverable. The scheme was recommended to the University by its accountants, KPMG. It involved the establishment by the University of a discretionary trust which it controlled, the grant of a lease to the trust on a full repairing basis, a lease back by the trust to the University on an internal repairing basis, waivers of exemption from VAT in relation to both the lease and the lease back, and an initial contract for refurbishment of the property entered into between the University and a wholly-owned subsidiary which was separately registered for VAT, for a sum of £3.5 million plus VAT of £612,500. The subsidiary then engaged building contractors at arm’s length to provide the necessary construction services. The purpose of the scheme, broadly stated, was to enable the University to claim that the refurbishment work was directly and immediately linked, not to its general supplies of education which were exempt, but rather to the supply of the lease which the University had opted to treat as a taxable supply. If the scheme worked, this would enable the University to recover the whole of the input tax instead of a small proportion of it.

It was held by the Upper Tribunal (Rose J and Judge Sinfield), reversing the FTT, that the scheme amounted to an abuse of law, and this conclusion was upheld by the Court of Appeal. As in the present case, there was no dispute about the second Halifax test, and the issue therefore was whether the first test was satisfied. Delivering the leading judgment (with which David Richards LJ agreed), Lewison LJ said at [14]:

“Whether the first test is satisfied entails identifying (a) the tax advantage that the scheme gave the University and (b) the purposes of that part of the VAT code with which we are concerned. It is then necessary to compare the purpose and objective of the part of the VAT code allegedly being abused with the purpose and results achieved by the activity at issue. If the tax advantage results from a choice that the VAT code intended to give the taxable person, there is no abuse: Advocate General Poiares Maduro in Halifax at para 88.”

In the course of considering the submissions for the University advanced by Paul Lasok QC, Lewison LJ referred to the post-Halifax decision of the CJEU in the Weald Leasing case (Case C-103/09, Revenue and Customs Commissioners v Weald Leasing Ltd [2011] STC 596) as authority for the proposition that consideration of the first test “positively requires an examination of the object and effects of the impugned transactions, as well as their purpose”: see [29]. He also rejected a submission that the question whether a transaction was artificial goes only to the second test, and is irrelevant in considering the first test. Lewison LJ said, at [33], that he found this submission “very difficult to square” with the (pre-Halifax) case of Emsland-Stärke GmbH v Hauptzollamt Hamburg-Jonas (Case C-110/99, [2000] ECR I-11569) in which the CJEU had said:

“…a finding that there is an abuse presupposes an intention on the part of the Community exporter to benefit from an advantage as a result of the application of the Community rule by artificially creating the conditions for obtaining it.”

Lewison LJ then said:

“34.

Clearly the artificial creation of conditions which formally comply with the requirements for obtaining a tax advantage is at the heart of the principle of abuse of rights. If Mr Lasok’s submission were correct it would simply substitute one form of formalism for another.”

In Weald Leasing, the CJEU had held that the principle of abuse of law was not engaged, in circumstances which Lewison LJ helpfully summarised in the Huddersfield case as follows, at [21]:

“…Weald Leasing concerned companies in the Churchill Group of companies, which principally made supplies of exempt insurance services. The operating companies, CML and CARC, were entitled to deduct only 1% of input tax incurred on purchase of equipment. Another company in the group, Weald Leasing, was set up to carry on the business of buying equipment and leasing it to a company outside the group (Suas Ltd) which in turn sub-leased the equipment to CML and CARC. CML and CARC thus avoided having to purchase directly the equipment they needed and avoided having to pay in a single sum the total amount of non-deductible VAT on those purchases. The aim of the transactions was to divide and spread the payment of that amount in order to defer the Churchill Group’s VAT liability.”

The critical point, as Lewison LJ said at [22], was that neither CML nor CARC owned the relevant equipment, so “the choice between acquisition outright and acquisition on lease was a real choice with commercial and practical effects in the real world”. It was in that context that the CJEU said, at paragraph 34 of its judgment:

“A taxable person cannot be criticised for choosing a leasing transaction which procures him an advantage consisting… in spreading the payment of his tax liability, rather than a purchase transaction which does not procure him any such advantage, provided that that the VAT on that leasing transaction is duly and fully paid.”

Another case in which the CJEU has held that the principle of abuse of law was not engaged is Case C-277/09, Revenue and Customs Commissioners v RBS Deutschland Holdings GmbH [2011] STC 345, on a reference from the Inner House of the Court of Session. In that case, a UK bank (RBS) chose to use its German subsidiary (RBSD) to enter into transactions involving the purchase, lease and lease-back of cars from an unconnected UK group in order to exploit differences in the way in which the Sixth Directive had been transposed into domestic law in the UK and Germany respectively, with the result that no VAT was chargeable on the relevant rental payments in either country. HMRC refused to permit RBSD to deduct the input tax which it had paid on the original purchase of the cars, arguing that RBSD had engaged in an abusive practice with the aim of obtaining a fiscal advantage contrary to the purpose of the Sixth Directive.

This argument was rejected by the CJEU. After noting (at paragraph 50) that the relevant transactions took place between unconnected parties in the context of normal commercial operations, and that the arrangements were not artificial in nature, the Court said:

“52.

In those circumstances, the fact that services were supplied to a company established in one member state by a company established in another member state and that the terms of the transactions carried out were chosen on the basis of factors specific to the economic operators concerned, cannot be regarded as constituting an abuse of rights. RBSD in fact provided the services at issue in the course of a genuine economic activity.

53.

It is important to add that taxable persons are generally free to choose the organisational structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purposes of limiting their tax burdens.

54.

The court has held 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 neutral system of VAT…”

Similarly, in the Cadbury Schweppes litigation concerning the UK controlled foreign company (“CFC”) legislation, the CJEU held that a restriction on the freedom of a company established in one Member State to establish a subsidiary in another Member State where tax rates were lower could only be justified on the ground of prevention of abusive practices if the specific objective of the restriction was “to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory”: see Case C-196/04, Cadbury Schweppes Plc and Anr v Inland Revenue Commissioners [2007] QB 30, [2006] STC 1908, at paragraph 55, and see too paragraphs 37 and 63-70.

I can now return to the guidance given by the CJEU in the present case. I have already referred to the guidance given by the Court on the issue of characterisation of the relevant supplies in paragraphs 40-43 of its judgment. The Court then considered the doctrine of abuse of law, in a passage which I need to set out almost in full:

“44.

It may, however, become apparent that, sometimes, certain contractual terms do not wholly reflect the economic and commercial reality of the transactions.

45.

That is the case in particular if it becomes apparent that those contractual terms constitute a purely artificial arrangement which does not correspond with the economic and commercial reality of the transactions.

46.

The court has held on various occasions that preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see Halifax, para 71 and the case law cited) and that the effect of the principle that the abuse of rights is prohibited is to bar wholly artificial arrangements which do not reflect economic reality and are set up with the sole aim of obtaining a tax advantage…

47.

In the main proceedings, it is not disputed that formally, in accordance with the contractual terms, Alabaster provided the lenders with the supplies of loan broking services and that it was the recipient of the supplies of advertising services provided by Wallace Barnaby.

48.

However, taking into account the economic reality of the business relationships between, on the one hand, Mr Newey, Alabaster and the lenders and, on the other hand, Mr Newey, Alabaster and Wallace Barnaby, as apparent from the order for reference and, in particular, the matters of fact mentioned by the Upper Tribunal…in the third question, it is conceivable that the effective use and enjoyment of the services at issue in the main proceedings took place in the United Kingdom and that Mr Newey profited therefrom.

49.

It is for the referring court, by means of an analysis of all the circumstances of the dispute in the main proceedings, to ascertain whether the contractual terms do not genuinely reflect economic reality and whether it is Mr Newey, and not Alabaster, who was actually the supplier of the loan broking services at issue and the recipient of the supplies of advertising services provided by Wallace Barnaby.

50.

If that were the case, those contractual terms would have to be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice (see, to that effect, Halifax, para 98).

51.

In the present case, the re-establishment of the situation that would have prevailed in the absence of the transactions at issue, if the referring court were to consider them to constitute an abusive practice, would, in particular, mean that the services agreement and the advertising arrangements concluded between Alabaster and Wallace Barnaby could not be relied upon against the Commissioners, who could legitimately regard Mr Newey as actually being the supplier of the loan broking services and the recipient of the supplies of advertising services at issue in the main proceedings.”

The Court then stated its conclusions on the first to fourth questions at paragraph 52, in terms reflected in the dispositif which I have already quoted at [7] above.

As is apparent from this passage, the CJEU did not rule out the possibility that, in the light of its knowledge of the facts found by the FTT and reflected in the order for reference, the transactions in issue might constitute an abuse in the Halifax sense. The key paragraph for this purpose is paragraph 48, which requires account to be taken of the economic reality of the relevant business relationships between each of Mr Newey, Alabaster, the lenders and Wallace Barnaby, as well as the matters of fact mentioned in the third question referred to the Court. The third question reads as follows:

“(3)

In circumstances such as those in the present case, in particular, to what extent is it relevant:

(a)

Whether the person who makes the supply as a matter of contract is under the overall control of another person?

(b)

Whether the business knowledge, commercial relationship and experience rest with a person other than that which enters into the contract?

(c)

Whether all or most of the decisive elements in the supply are performed by a person other than that which enters onto the contract?

(d)

Whether the commercial risk of financial or reputational loss arsing from the supply rests with someone other than that which enters into the contracts?

(e)

Whether the person making the supply, as a matter of contract, sub-contracts decisive elements necessary for such a supply to a person controlling that first person and such sub-contracting arrangements lack certain commercial features?”

Since it is not the function of the CJEU to decide issues of fact, the question was remitted in the usual way to the Upper Tribunal as the referring court. A question which we raised at the hearing was what degree of probability the CJEU had in mind when it used the expression “it is conceivable that” in paragraph 48. Some light may be thrown on this by the original French text, with which we were supplied at our request after the hearing. The words “it is conceivable that” are a translation of “il ne peut être exclu que”, which might be more literally rendered as “it cannot be excluded that”, or more colloquially as “one cannot rule out the possibility that”. To my mind, the French phrase may imply a slightly higher degree of likelihood than the English phrase, but the important point is that the CJEU clearly considered the possibility to be a real one when all the relevant factors had been fully taken into account, although it presumably considered such an outcome to be relatively improbable on the information which it had available to it: otherwise a less tentative expression would have been used.

I should add that I accept the submission of counsel for Mr Newey that the CJEU was not intending to lay down any new principles of law, as is demonstrated by the fact that it gave judgment without an opinion from the Advocate General: see article 20(5) of the Statute of the CJEU.

I have already referred to or incorporated many of the FTT’s findings of primary fact, and set out much of the important evaluative findings which they made at [50] to [53] of the FTT Decision. Without attempting to be exhaustive, I will now summarise the other parts of it which seem to me most important for the resolution of this appeal.

The FTT discussed the Services Agreement at [20] to [28]. They found that it was not an arm’s length agreement when viewed as a whole, because it provided for Alabaster to have the use of the valuable and established trade name “Ocean Finance” at no cost: [23]. They also agreed with HMRC that the Services Agreement “lacked commercial detail that might be expected in an arm’s length contract between independent third parties”, but added at [26] that:

“…any deficiencies in this respect can be attributed to the fact that this was not such an arrangement. [Mr Newey] 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 [Mr Newey] were anything other than those performed under and by virtue of the services agreement.”

The FTT also rejected HMRC’s description of the Services Agreement as a “tax-driven document”. They continued, at [27]:

“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 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… 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 [Mr Newey] and Alabaster… We find that the processing operations and other serves performed by [Mr Newey] 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 [Mr Newey]. 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 [Mr Newey] in respect of Alabaster’s business, such as its profitability, and income and costs, might not be known to an arms’ 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 [Mr Newey] and Alabaster was anything other than contractor and sub-contractor.”

The FTT then proceeded to make detailed findings of fact about the lenders, the advertising arrangements, and the loan-broking and processing operations, before concluding the factual part of the decision with the evaluative further findings from which I have already quoted: see [26] above.

The next section of the FTT Decision, running from [54] to [78], dealt with the first main issue, namely the characterisation of the relevant supplies. In the light of the relevant principles of VAT law, were the loan-broking services supplied by Alabaster or Mr Newey, and to which of them were the advertising services supplied? In all essential respects, it seems to me that the FTT directed themselves correctly on the relevant legal principles, including the need to examine the factual circumstances as a whole, the fact that the contractual position is not necessarily conclusive, although it must be the starting point, and the need to have regard to the economic purpose of the contracts. They observed correctly, at [71], 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.”

With regard to the question of reciprocity, the FTT rejected HMRC’s arguments that in a loan-broking business the reciprocity was between the lenders and the broker, whereas in this case it lay between the lenders and Mr Newey. This submission was based on the business dealings between Mr Newey and the lenders, as was a similar submission based on his role in the advertising process. The FFT said, at [75]:

“We do not consider that on the facts of this case there was reciprocity between [Mr Newey] and the lenders nor between [Mr Newey] and Wallace Barnaby in relation to the advertising services so as to conclude that supplies of loan-broking services were made by [him] to the lenders or supplies of advertising services by Wallace Barnaby to [him]. 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 [Mr Newey] 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 [Mr Newey] 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 [Mr Newey] in that respect was wholly consistent with the supplies it made to Alabaster under the services agreement, for which [he] received consideration from Alabaster. There was no relevant link between [Mr Newey] and Wallace Barnaby; certainly not one that could lead us to conclude that there was a transaction between Wallace Barnaby and [Mr Newey] for consideration. Contrary to Mr Vajda’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 [Mr Newey] under the services agreement.”

In view of this analysis, the FTT concluded at [78] that it was Alabaster, not Mr Newey, that made the supplies of loan-broking services to the lenders, and that it was Alabaster, and not Mr Newey, who received the supplies of advertising services.

The FTT then turned to the issue of abuse of law, expressly doing so on the basis of their decision on the first issue: see [79]. After citing extensively from the decision of the CJEU in Halifax, the FTT at [85] approached the issue by reference to the four questions set out by Lord Neuberger MR in the WHA case, at [12]:

“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”?”

The FTT discussed the first of Lord Neuberger’s four questions at [86] to [95]. They began their discussion by seeking to identify the relevant purpose of the Sixth Directive, and what was required by the principle of fiscal neutrality. After referring to Lord Neuberger’s endorsement of HMRC’s submissions in WHA at [16] to [17], the FTT continued as follows, in a key passage which I need to set out at some length:

“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 [Mr Newey] 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 Vajda 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 [Mr Newey] 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 Vajda’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 which 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… Nor do we accept Mr Vajda’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 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 Vajda 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.”

It is important to note that in [90] the FTT appear to have proceeded on the express footing that the Alabaster arrangements did not involve the making of any exempt supplies in the UK, and that it was the absence of any such exempt supplies which made HMRC’s arguments unsustainable. Had such exempt supplies existed, the FTT clearly considered it arguable that a scheme designed to prevent otherwise irrecoverable input VAT from being incurred might be contrary to the purposes of the VAT legislation. Unfortunately, however, it is common ground that the FTT were mistaken in their assumption, at any rate if it is read literally. It has always been an agreed fact that, under the new arrangements involving Lichfield and then Alabaster, exempt supplies of financial services continued to be made in the UK by the Jersey company. This apparent error of law was accordingly one of the grounds upon which HMRC appealed to the Upper Tribunal, and it is also the subject of the third ground of appeal to this court. Furthermore, the perceived absence of an exempt supply to which irrecoverable VAT might be attributable is a theme which runs through the FTT’s remaining discussion of this issue: see [92] and [95].

In view of their conclusion on the first question, it was strictly unnecessary for the FTT to consider the other three questions formulated by Lord Neuberger MR, but they helpfully did so in case they were wrong on the first question. I can deal briefly with their treatment of the second question, because it is now common ground that the second Halifax test is satisfied. It is enough to quote the FTT’s conclusion, at [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 [Mr Newey’s] former business of loan-broking there was no commercial justification for [Mr Newey] 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.”

On the assumption that both limbs of the Halifax test were satisfied, the FTT then considered the question of redefinition of the transactions at [103] to [108], concluding (in agreement with HMRC’s submissions) that the abusive advantage would have to be eliminated by treating Mr Newey as having received in the UK the supplies of advertising services made in Jersey to Alabaster, and as making in the UK the supplies of loan-broking services made by Alabaster.

The UT Decision is very long, and at times somewhat discursive, so I will need to be selective in my treatment of it.

After setting out a summary of the main facts and the relevant legislation, the Upper Tribunal reviewed the guidance given by the CJEU in the present case and placed it in the context of other relevant case law, including one case which I have not yet mentioned, namely the decision of the Supreme Court in Secret Hotels2 v Revenue and Customs Commissioners [2014] UKSC 16, [2014] STC 937. The reason why I have not mentioned it is that, although it contains helpful and authoritative guidance on the characterisation of supplies, there was no issue of abuse of law.

At [49] to [55], the Upper Tribunal made two points about the CJEU judgment in the present case. The first point was that the judgment “was not saying anything significantly new”. As I have already indicated, I agree. The second point related to the extent of the guidance which the CJEU was intending to give. In this context, the Upper Tribunal said at [55]:

“In the context of the facts in the present case, the CJEU did not, in my view, perceive any scope for departure from the contractual terms unless the arrangements were wholly artificial and did not reflect the economic and commercial reality…”

One of HMRC’s criticisms of the UT Decision, reflected in the second ground of appeal, is that here and in other places the Upper Tribunal appears to have taken the relevant test to be that, in order for the arrangements to be abusive, they must be “wholly artificial”, whereas the true position (it is said) is that schemes can be artificial in the sense used by the CJEU while having real commercial consequences. At this point, I would merely observe that, in [49], the Upper Tribunal had referred to “ wholly artificial arrangements” as being “ the paradigm” of transactions which are carried out solely for the purpose of obtaining abusive tax advantages, a formulation which appears to leave room for the possibility that a lesser degree of artificiality may suffice.

In the next main section of the UT Decision, running from [56] to [90], the Upper Tribunal reviewed and commented on the FTT Decision. The Upper Tribunal then discussed the correct approach to the two issues (i.e. the categorisation of supplies issue and abuse of law) at [91] to [99], before embarking on a lengthy recital and discussion of HMRC’s case on the first of those issues (running from [100] to [176]) and a rather shorter review of HMRC’s case on the abuse issue (at [177] to [192]). The Upper Tribunal then summarised Mr Newey’s case, at [193] to [211].

After these lengthy preliminaries, the Upper Tribunal set out its own analysis and conclusions. It began with the categorisation of supplies issue, which it dealt with briefly at [213] to [216], concluding that the FTT had been entitled to reach the conclusions which it did. Indeed, Warren J said that he would have reached the same conclusion himself. Although he saw force in some of the criticisms made by HMRC, he did not consider that, even taken cumulatively, they cast serious doubt on the FTT’s conclusion on this issue: see [215].

The Upper Tribunal then turned to the abuse issue, which it considered from [217] to [258]. It made the observation, at [219], that it is apparent from the CJEU’s judgment that, in principle, an abusive practice can be found to exist even where the abusive transactions are not simply inserted into an existing structure, but where a completely new structure is adopted. This follows from the express recognition by the CJEU that the doctrine of abuse of law might conceivably apply to the facts of the present case. I agree with this observation.

The Upper Tribunal next addressed the question whether the contractual terms of the new arrangements did genuinely reflect economic reality. It directed itself at [222], by reference to paragraphs 45 and 46 of the CJEU’s judgment, that it had to be established that the scheme comprised “wholly artificial arrangements which do not reflect economic reality”, or that the contractual terms constituted “a purely artificial arrangement” which did not correspond with the economic and commercial reality of the transactions. The Upper Tribunal observed that the FFT did not in terms address that question, but said that they did discuss the relevant issues when dealing with the categorisation of supplies issue, saying at [223]:

“Their findings of primary fact are applicable to the Abuse Issue as much as to the Categorisation of Supplies Issue; and aspects of their evaluation are apposite to the redefinition of the contractual terms as the result of abusive practice just as much as to the categorisation of the supplies absent any abuse.”

Again, I agree.

The Upper Tribunal then referred to the part of the FTT Decision which expressly dealt with abuse of law, and at [228] to [231] addressed HMRC’s argument that the FTT had erroneously proceeded on the basis that there were no exempt supplies in the UK under the Alabaster arrangements. The Upper Tribunal acknowledged that this submission had “more than a superficial attraction”, and that on a literal reading the FTT’s assumption appeared to be erroneous. Nevertheless, the Upper Tribunal was reluctant to conclude that the FTT “simply got this point wrong”. It was unlikely that the FTT had overlooked the fact that Alabaster was itself making exempt supplies in the UK, when the relevant statutory provisions had been identified by them in the FTT Decision at [94]. Furthermore, HMRC’s argument had been based on a comparison between the Alabaster arrangements and what would have resulted if exempt supplies had been made in the UK by a person with a place of belonging in the UK, i.e. Mr Newey. Warren J said, at the end of [231], that if one reads the relevant part of the FTT Decision in that way, “it makes perfect sense”, and he would proceed accordingly. Even on that basis, however, the FTT’s view could not be supported, because it appeared to state as a matter of law that, if the transactions carried out by Alabaster were genuine, it would be impossible to make a finding of abuse. Such a conclusion would be irreconcilable with the possibility envisaged by the CJEU that the relevant supplies were made to or by Mr Newey in consequence of a finding of abuse: see [232].

The Upper Tribunal then recorded its agreement with the view of the FTT that the first Halifax test should be applied to the new arrangements set up by Mr Newey on their own merits, and not by way of comparison with the pre-existing structure. Otherwise, identical arrangements might be differently treated depending on whether they were set up from scratch or whether they replaced an existing structure. This would not accord either with the principle of fiscal neutrality or with the need for legal certainty. This point is common ground, as Mr Thomas accepted more than once in his oral submissions, and I too agree with it.

The Upper Tribunal then said, at [235]:

“It follows from this discussion, and in particular the conclusion in para [233], above, that the reasoning by which the [FTT] reached their conclusion on the first element of the Halifax test cannot stand in the light of the CJEU Judgment.”

The reference to paragraph [233] must, I think, be an error for [232], which is the only place where the Upper Tribunal had said in terms that it considered the FTT to have erred: see [84] above. It should also be noted that [235] is the only paragraph of the UT Decision to which Warren J referred, in his later decision on permission to appeal, as involving faulty reasoning (and thus an error of law) by the FTT.

The Upper Tribunal then returned to the question whether the scheme comprised wholly artificial arrangements in the Halifax sense. It accepted, at [242], that although the FTT had carried out their evaluation of the primary facts in the context of the categorisation of supplies issue, many of their conclusions were relevant to the issue of artificiality; and if HMRC’s attacks on those findings of fact were all to fail, there would then be no prospect of successfully establishing a case of abuse. It was in this context that the Upper Tribunal stated its key conclusions at [244] to [246], which I have already quoted at [8] above. I draw attention, in particular, to two aspects of those conclusions:

HMRC’s first, and main, ground of appeal is (in summary) that the scheme as a whole is an abuse of law, the FTT did not determine the issue on the correct basis, and if the Upper Tribunal had properly directed itself in accordance with the judgment of the CJEU in the present case it could not have concluded otherwise: see paragraph 4 of the grounds of appeal on ground 1. This basic contention is then elaborated over some 25 paragraphs.

Ground 2 is that the Upper Tribunal in any event approached its analysis of artificiality on an incorrect basis, applying a test of whether the arrangements in question were “wholly artificial”. Accordingly, it is said, the Upper Tribunal’s analysis proceeded “at the wrong level of generality”, and failed to focus on those elements of the scheme which had no commercial rationale.

Ground 3 is based on the FTT’s apparently erroneous view that the Alabaster arrangements did not involve the making of any exempt supply of services, and challenges the Upper Tribunal’s view that the FTT cannot have overlooked the fact that there was an exempt supply in the UK.

Ground 4 (which I have not yet mentioned) overlaps with ground 1, and asserts that the purpose of the legislation is defeated where “the rules which seek to define the territorial limits of the EU’s tax directives are engaged artificially in circumstances where the effective use and enjoyment of the services takes place in the EU.” It is said that the Upper Tribunal was wrong to reach the contrary conclusion at [244] of the UT Decision.

As a matter of logic, it seems to me that the first question which has to be considered is whether the Upper Tribunal was right to diagnose an error of law in the FTT Decision. In the absence of such an error of law, it would not have been open to the Upper Tribunal to go on (as it did) to consider for itself whether the FTT had been entitled to reach the conclusion that it did.

Section 12 of TCEA 2007 sets out the powers which the Upper Tribunal may exercise if, but only if, it finds that the decision of the FTT “involved the making of an error on a point of law”. The Upper Tribunal “may (but need not) set aside the decision” of the FTT, and if it does so, it must either remit the case to the FTT with directions for its reconsideration, or itself re-make the decision. If the Upper Tribunal decides to re-make the decision, it has the further powers set out in subsection (4), including power to “make such findings of fact as it considers appropriate”. At that stage, as Lord Carnwath pointed out in Pendragon at [50], (see [10] above), the Upper Tribunal is not bound by the factual findings of the FTT, although it will pay respect to them (and, I would add, to all the advantages which the FTT had as the fact finding body at the original hearing).

In deciding whether or not to set aside the decision of the FTT, a test of materiality will usually be decisive, in the sense that the Upper Tribunal will normally intervene only if it is satisfied that the error of law might, not would, have made a difference to the decision. Conversely, if an error of law was made, but the Upper Tribunal is satisfied that it was immaterial, there will normally be no injustice in allowing the decision of the lower tribunal to stand. Similar principles apply on an appeal from the Upper Tribunal to this court, which also lies only on a question of law: see Degorce v Revenue and Customs Commissioners [2017] EWCA Civ 1427, [2017] STC 2226, at [95].

This was, I think, in substance the approach adopted by the Upper Tribunal in this case, because it decided to dismiss HMRC’s appeal from the FTT Decision despite the error of law which it had identified. The Upper Tribunal took the view that the FTT was entitled to evaluate the facts as it did and to reach a conclusion which should not be disturbed: see the UT Decision at [258]. In other words, the Upper Tribunal considered the error of law to be immaterial.

The Upper Tribunal clearly thought that it had found an error of approach, amounting to an error of law, in the FTT Decision, because Warren J said as much in paragraphs 4 and 5 of his reasons for granting permission to appeal on ground 1. I do not, however, find it entirely clear how far the Upper Tribunal considered the FTT’s approach to have been erroneous. On a narrow view, the only error expressly identified is that in [232] of the UT Decision, based on the Upper Tribunal’s understanding of what the FTT had meant when it said that Alabaster was not making exempt supplies in the UK. Even on the basis that the FTT had meant to say that there was no actual exempt supply in the UK “by a person with a place of belonging in the UK”, the FTT had been wrong to say that this precluded a finding of abuse so long as the transactions carried out by Alabaster were genuine and not shams. Such a conclusion, as the Upper Tribunal correctly said, would be contrary to the judgment of the CJEU in the present case, which did not rule out the possibility that the relevant supplies could be redefined as having been made to Mr Newey. On a broader view, however, when the Upper Tribunal said at [235] that it followed from its previous discussion, and “in particular” the conclusion in [232], that the reasoning by which the FTT reached it conclusion on the first Halifax test could not stand in the light of the CJEU judgment, the Upper Tribunal must have had in mind a more extensive (if entirely understandable) failure by the FTT to follow the approach to the first Halifax test laid down by the CJEU after the date of the FTT Decision. There are certainly passages in the UT Decision which can be read as lending support to a wider diagnosis of error of this nature: see, for example, [95], where the Upper Tribunal characterised the FTT’s approach to the abuse issue as a “higher level approach”, which did not separately examine the question whether the arrangements were “wholly artificial transactions” which did not reflect the commercial and economic reality.

It is fortunately unnecessary for us to decide how far the Upper Tribunal’s diagnosis of error was intended to go, because I am satisfied that even on the narrower view there was clearly a material error of law in the FTT Decision. Furthermore, in respectful disagreement with the Upper Tribunal, I am unable to accept its benevolent reading of the FTT’s repeated statements that the arrangements in Jersey did not involve the making of any exempt supplies in the UK. I cannot escape the impression that, at this critical point in their analysis of the abuse issue, the FTT momentarily lost sight of the agreed fact that Alabaster did make supplies of exempt services in the UK. If the FTT had in mind that there were indeed exempt supplies made by Alabaster, but the fact that they were made by a person who did not belong in the UK made all the difference, they would surely have said so. Furthermore, it would then have been necessary for the FTT to explain why, on that basis, the mischief which they had correctly identified (of artificial attempts to avoid or neutralise the burden of input tax attributable to exempt supplies) was no longer applicable, and why the Jersey arrangements were nevertheless not contrary to the purpose of the VAT legislation.

For my part, I think the FTT must also be taken to have materially erred in law in not adopting the approach laid down in this very case by the CJEU. To say this is not to criticise them, because they could hardly have foreseen the way in which the CJEU would deal with the questions subsequently referred to it, and in particular its synoptic approach to the two main issues of characterisation of the supplies and abuse of law. But it would in my view be paradoxical to hold that there was no error of law in the FTT’s overall approach, when the CJEU had the FTT Decision before it and nevertheless concluded that it was conceivable that the relevant transactions were abusive. It is thus not sufficient, in my judgment, to point to individual passages in the FTT Decision which touch on specific questions identified by the CJEU, including in particular those in the third question referred, and argue that the overall evaluation required by the CJEU has in substance already been carried out by the FTT. Mr Ghosh advanced this argument persuasively, but I cannot accept it. An error of law may lie in a failure to adopt an overall approach to the evaluation of the facts, as well as in an erroneous approach to any of the component considerations which have to be taken into account. It is this sort of high level error of approach, it seems to me, that Lord Sumption described in Pendragon at [39], where he criticised the FTT in that case for having approached their task “at too high a level of generality”.

If I am right in my conclusion that the FTT made material errors of law, the next question is whether the Upper Tribunal, having identified at least one such error, itself erred in law in its analysis and disposal of HMRC’s appeal to it. I can deal with this issue briefly, because I have already found that the Upper Tribunal erred in its interpretation of what the FTT meant when they said that the arrangements did not involve the making of any exempt supplies. That was in my view an error of law, and it infected the Upper Tribunal’s whole discussion of the issue. I also consider that the Upper Tribunal was wrong, more generally, in the approach which it adopted to the FTT Decision, after finding it to be erroneous in point of law. I cannot agree with the Upper Tribunal’s apparent conclusion that the errors made by the FTT were immaterial, or that its own role was limited to considering whether the FTT had been entitled to reach the conclusion it did. That was the approach adopted by the Court of Appeal in Pendragon, and the Upper Tribunal cannot be criticised for having followed it; but the decision of the Supreme Court in Pendragon showed it to be mistaken, as Warren J implicitly recognised when granting permission to appeal to this court from the UT Decision.

Without going any further, therefore, I am satisfied that the UT Decision cannot stand, and this court must either re-make the decision itself or remit the case, either to the Upper Tribunal or to the FTT, with directions for its reconsideration: see section 14 of TCEA 2007.

In the circumstances, I do not find it necessary to express a concluded view on the third ground of appeal, which says (in effect) that the Upper Tribunal set the bar too high by applying a test of whether the relevant arrangements were “wholly artificial”. I see force in the criticism that the Upper Tribunal does at times seem to have stated this as the sole test, without qualification, whereas a careful reading of the CJEU judgment suggests that total artificiality is not an invariable requirement, but rather a paradigm example of where the contractual terms do not reflect economic and commercial reality. But, as I have already noted (see [79] above), the Upper Tribunal clearly had this point in mind at [49] of the UT Decision, and it is also apparent from many of the leading cases that contractual arrangements can be found to be abusive even if they are genuine and play a part in arrangements which have an overall commercial purpose. I would therefore be inclined to read the passages where the Upper Tribunal appears to adopt a test of total artificiality as implicitly subject to the qualification which I have mentioned. If that were the only alleged error in the UT Decision, I would not be persuaded that this court should intervene.

Given the length of time which has elapsed since the FTT hearing in 2010, it would for obvious reasons be preferable if we were able to re-make the decision ourselves rather than remit it for yet further consideration. For the reasons which follow, however, I consider that we are not in a position to do so, and that the correct solution is to remit the case to the FTT.

My starting point is that the arrangements set up in Jersey by Mr Newey could at least potentially engage the provisions and purposes of the Sixth Directive, notwithstanding that Jersey is a “third country” outside the EU, and the fact that both Alabaster (previously Lichfield) and Wallace Barnaby (previously Abacus) are Jersey companies which belong in Jersey for UK VAT purposes. The main reason why the Sixth Directive is potentially engaged is that both Alabaster and Lichfield were established by Mr Newey with the sole object that they should provide supplies of loan-broking services to customers in the UK, that is to say within the EU. Those services were and are exempt, but exemption is itself an integral part of the common system of VAT. Furthermore, the place of supply of those exempt services is prima facie the UK: see Article 9(2)(e) of the Sixth Directive. The position under VATA 1994 is a little more complex, but the services are treated as supplied in the UK (where the recipient lenders “belong”) by virtue of article 16 of the Value Added Tax (Place of Supply of Services) Order 1992 (SI 1992/3121), made pursuant to section 7(11) of the 1994 Act.

In those circumstances, I consider that there may arguably be scope for operation of the principles that any input tax on supplies which are attributable to the exempt supplies should be duly paid, and that steps taken to avoid incurring such input tax could (depending on the facts) be abusive. The relevant supplies for present purposes are those of advertising services, made by Wallace Barnaby to Alabaster (I shall henceforth not refer separately to Lichfield and Abacus, but the same principles apply to them). As such, the supplies of advertising fall outside the immediate scope of VAT in the UK, because both companies belong in Jersey and (importantly) the UK has not taken advantage of the derogation in Article 9(3) of the Sixth Directive to treat the place of supply of those services as the UK, that being the country where their effective use and enjoyment takes place. That being so, I do not see how, if the arrangements in Jersey are viewed in isolation, it could sensibly be said that it was contrary to the purposes of the Sixth Directive for Alabaster to choose to obtain its advertising services from Wallace Barnaby. Alabaster was simply taking advantage of the freedom which any trader has to structure its business in a tax-effective manner. This freedom has been repeatedly recognised in the jurisprudence on abuse of law, not least by the CJEU in Halifax and by the Supreme Court in Pendragon. I have quoted some of the relevant passages earlier in this judgment: see [43] and [49] above.

Can it then make any difference to this analysis that Alabaster was incorporated on the instructions of Mr Newey, as part of a tax avoidance scheme which was designed and implemented with the sole object of relieving him from the burden of irrecoverable VAT previously borne by him as a sole trader in the United Kingdom? In my judgment this is the critical question. As Advocate General Maduro said in paragraph 85 of his opinion in Halifax, quoted at [45] above, “[t]he normative goal of the principle of prohibition of abuse within the VAT system is precisely that of defining the realm of choices that the common VAT rules have left open to taxable persons.” Thus it is necessary to ask whether the common system of VAT has left it open to Mr Newey to choose to restructure his business in the way that he did.

On behalf of Mr Newey, Mr Ghosh submits that this question must be answered in the affirmative. He submits that it is essentially a threshold issue, which must be kept separate from analysis of the chosen business structure once it has been established. It is no part of the common system of VAT, he submits, to dictate to a trader whether he should carry on his business as a sole trader, or in partnership, or through a corporate vehicle; or whether the business should be carried on inside or outside the EU. Furthermore, it is irrelevant whether these choices are motivated mainly, or even solely, by fiscal considerations. Once the choice has been made, and a structure for carrying on the business has been established, the VAT rules will then apply to it in the usual way, unless it can be seen, on examination, that the arrangements are artificial and do not reflect economic and commercial reality. In that case, there may well be scope for the doctrine of abuse of law to operate; but the doctrine cannot legitimately be used to undermine Mr Newey’s threshold decision to incorporate his business in Jersey. The effect of that choice, if it was properly implemented, was that the business would now be carried on by a different legal person, namely Alabaster, in a different location, namely Jersey; and that the necessary advertising services would likewise be provided in Jersey, pursuant to the contract made between Alabaster and Wallace Barnaby.

I accept this submission, and agree that it was in principle open to Mr Newey to decide that the business of Ocean Finance should henceforth be carried on by Alabaster in Jersey, with the benefit of advertising services provided by Wallace Barnaby. Mr Newey’s decision to restructure the business of Ocean Finance in this way was purely tax driven, but that in itself does not make it artificial or abusive. On the contrary, there was nothing unreal or artificial about the underlying business of Ocean Finance, and the decision to incorporate it in Jersey was a rational piece of tax planning which sought to take advantage of the territorial scope of VAT and the freedom of any trader to incorporate his own business so that it is carried on in future by a different legal entity in a different location. It is none of the business of the common system of VAT, or of national revenue authorities, to interfere with business choices of that nature, provided that they are properly implemented and the form of the new arrangements corresponds with their economic and commercial substance.

It is in this context, as it seems to me, that the evaluation mandated by the CJEU in the present case must be performed. The CJEU cannot have meant that the threshold choice of structure should be disregarded merely because it was purely tax driven, because in that case the outcome would have been obvious, and it would not have been merely “conceivable” that Mr Newey was still to be regarded as the supplier of the loan-broking services and the recipient of the advertising services. The CJEU must therefore have meant that the question of artificiality has to be assessed by reference to the business relationships actually entered into between Mr Newey, Alabaster, the lenders and Wallace Barnaby, with a view to testing whether they reflected underlying commercial reality. A central focus of this enquiry would naturally fall on the continued role of Mr Newey himself, and his relationship with Alabaster. Was the board of directors of Alabaster truly independent from him, or was he a shadow director with whose instructions or wishes they invariably complied? Were the loan processing functions which he and his staff continued to carry on in Staffordshire now genuinely provided to Alabaster pursuant to the Services Agreement, or was the commercial reality that Mr Newey was still carrying out the work on his own behalf? Were the advertising services provided by Wallace Barnaby to Alabaster genuinely the product of an independent commercial relationship between those two companies, or was this just elaborate machinery set up to enable Mr Newey’s decisions on advertising in the UK to be implemented via his meetings with Ekay Advertising, the recommendations made by Ekay Advertising to Wallace Barnaby, and the power which he retained to approve the content of advertisements? And what is the true significance, in this context, of the fact that late advertising space offered to Alabaster was on occasion not taken up because an Alabaster director was unavailable to approve it?

The nub of Mr Newey’s case is that this task of evaluation has in substance already been carried out by the FTT; that the guidance given by the CJEU adds nothing of any significance to the law as it was understood and applied by the FTT; and that the thorough and careful review of the FTT Decision by the Upper Tribunal shows not only that the FTT reached a tenable conclusion, but that no other conclusion would have been reasonably open to it. After such a painstaking review of the evidence by two specialist tribunals, it is said, there could be no proper basis for this court to interfere.

This argument was attractively presented by counsel for Mr Newey in their written submissions, and by Mr Ghosh in his well-judged oral submissions to us. Initially I was inclined to find it persuasive, but on further reflection I am unable to accept it. The fundamental difficulty may be simply stated. The decisions of both Tribunals are (as I have held) vitiated by material errors of law, with the consequence that the evaluation of the facts required by the CJEU has not yet been performed by a fact-finding body which has directed itself correctly in law. In those circumstances, I see no escape from the conclusion that the case must be remitted so that this task can for the first time be properly performed in all respects.

The alternative would be for this court to embark on the task itself, but for a number of reasons that would be unsatisfactory. The principal role of this court is appellate and supervisory. Save in exceptional circumstances, it does not find facts itself, and we have not heard evidence from the witnesses. Nor have we been supplied with a transcript of the hearing before the FTT. I therefore consider that our power under section 14 of TCEA 2007 to re-make the decision, and for that purpose to make such findings of fact as we consider appropriate, is one which we should exercise sparingly, if at all. We should not do so if we feel any real doubt about how the FTT, as the primary fact-finding body, would have decided the case if it had the benefit of (a) the guidance given by the CJEU, (b) the relevant case law (both European and domestic) since April 2010 (including, in particular, the decision of the Supreme Court in Pendragon and the judgment of this court in the University of Huddersfield case), (c) the UT Decision, and (d) our judgment on this appeal.

For my part, I do not feel confident enough about the conclusion to which the FTT would have come in those circumstances to dispense with the need for a remitter. If the submissions for Mr Newey are correct, it will not take the FTT long to confirm their original decision. But the contrary possibility envisaged by the CJEU seems to me a real one, when the facts come to be reviewed with a closer focus than before on the specific issues raised by the third question for reference in the manner explained by the CJEU. It cannot be a sufficient answer, in my judgment, to say that no new principles of law were laid down by the CJEU in its judgment. That is so, but there is no exact precedent of which I am aware in the earlier European case law, let alone as it stood before the FTT hearing in February 2010, for treating together the issues of characterisation of the supplies and the doctrine of abuse of law as the CJEU has done in the present case. Furthermore, there can realistically be no substitute for performing the task with the benefit of the guidance given by the CJEU in this very case, after and in the light of the original FTT Decision.

It will be apparent from what I have already said that if, as I think, the case must be remitted, it is clearly preferable that it should be remitted to the FTT rather that the Upper Tribunal. One incidental reason for this is the fact that Warren J has now retired, but more importantly it is in my view far preferable that the task of re-examining and evaluating the evidence should be carried out by the body which conducted the oral hearing, and which heard and saw the witnesses give their evidence. Those advantages of a trial court or tribunal cannot normally be replicated by an appellate body, even with the benefit of a full transcript. A further advantage of remitting the case to the FTT is that it would be open to them, if they considered it necessary or helpful to do so having received submissions from the parties, to admit further written or oral evidence at a resumed hearing.

As to the terms on which the case is remitted, I would not wish to be prescriptive and would leave it to the FTT to decide on the procedure which they adopt, the extent of any further written or oral submissions from the parties, and whether there should be an opportunity to adduce further evidence. In general, I envisage that there would be no need for the FTT to revisit their findings of primary fact, although they may wish in some respects to supplement them. They will, however, clearly need to reconsider their evaluative findings and conclusions in the light of the further guidance now available to them.

For these reasons, therefore, if the other members of the court agree, I would allow HMRC’s appeal, set aside the decision of the Upper Tribunal, and remit the case to the FTT for further consideration in the light of the guidance given by the CJEU and the judgment of this court.

I agree.

I agree.