UK Supreme Court: Case Preview: WHA Ltd v Her Majesty’s Revenue and Customs

20 01 2013

The case of WHA Limited and another (Appellants) v Her Majesty’s Revenue and Customs (Respondent, “HMRC”) UKSC 2009/0074 will be heard in the UK Supreme Court from 21 to 24 January 2013 and it shall be streamed online here. Lords Hope, Walker, Mance, Reed and Carnwath JJSC will hear the appeal.


WHA Limited (“WHA”) and Viscount Reinsurance Company Limited (“V”) are part of a group of companies providing motor breakdown insurance. V is the reinsurer, in effect standing in the shoes of the original insurer with whom the breakdown policies were taken out with. V contracts with WHA to handle the claims. WHA also contracts with garages to carry out repairs to vehicles. The garages invoice WHA the cost of the repairs. It was originally envisaged that WHA would treat the VAT added by the garages as input tax and not therefore charge it on to V.

The Court of Appeal, giving an interim judgment, held that this was not permissible and that WHA must charge V the VAT. However, V then passes this cost onto other companies within the group between which, due to geographical location, no VAT is due. Subject to adjourned consideration of arguments based on the doctrine of “abuse of rights”, Viscount was entitled to claim back the VAT from HMRC. This meant that the group of companies escaped paying VAT on the garage services.

The Court of Appeal’s subsequent judgment on the “abuse of rights” issue concluded that such a corporate structure was indeed such an abuse, as it held that its sole purpose was to avoid paying tax. In 2007, permission was granted to appeal to the House of Lords, whose role the Supreme Court has since assumed.

The case was stayed pending the result of proceedings in a case relevant to the instant one. In August 2010, the Appellants applied for the case to be further stayed pending the result of potentially relevant separate proceedings before the Court of Justice for the European Union (“CJEU”). A stay was granted. A directions hearing was subsequently fixed before the Supreme Court to take place in November 2011, at which the Appellants sought a reference on the issues arising in this appeal to the CJEU. This was refused.


Whether there is a “supply of services” for the purposes of the first WHA’s business by garages to the WHA, in addition to or instead of such a supply to insured parties, on which WHA may claim input tax under section 24(1) of the Value Added Tax Act 1994. If that question is answered in the affirmative, whether the EU law doctrine of “abuse of rights”, developed in Halifax plc v Customs and Excise Commissioners (Case C 255/02) [2006] 2 WLR 905 should be applied to strike down or “redefine” a scheme which would otherwise permit the second Appellant to reclaim VAT paid on the first Appellant’s invoices to it.

The Court of Appeal’s Judgment: WHA Ltd & Anor v Revenue and Customs [2007] EWCA Civ 728 (17 July 2007)

The Court held (Waller, Latham and Neuberger LJJ, read judgment) that a scheme designed to minimise the taxpayers’ liability to VAT in the context of the supply of repairs and parts provided pursuant to contracts of motor breakdown insurance was struck down as an abusive practice under Community law because its sole purpose was to achieve a tax advantage.

As noted above HMRC appealed against a decision [2003] EWHC 305 (Ch), [2003] S.T.C. 648 concerning the effectiveness of a scheme designed to minimise the liability to VAT of the respondent taxpayers in the context of the supply of repairs and parts provided pursuant to contracts of motor breakdown insurance.

Lord Neuberger [5] explained the proceedings as:

The matter came before us as the first part of an appeal from a decision of Lloyd J. He had allowed an appeal by the taxpayers against the decision of the VAT and Duties Tribunal (“the Tribunal”), in favour of the Commissioners for Customs and Excise, now Her Majesty’s Revenue and Customs (“HMRC”). In effect, we held, in part for different reasons from Lloyd J, that the Scheme had the effect for which the taxpayers contended.

His Lordship also explained [5] – [6] that:

First, WHA, Viscount and Crystal are and always have been part of the same group of companies. WHA is a wholly owned English subsidiary of an entity called Oriel, itself an English company. Oriel also owns all the shares in another English company called Warranty, which in turn owns all the shares in a Gibraltar company called Practical, of which both Crystal and Viscount are wholly owned Gibraltar subsidiaries. Secondly, under the Scheme, NIG’s insurance liabilities to motorists with MBI policies are 100% reinsured by Crystal, which in turn retrocedes 85% of its reinsurance liability to Viscount. Thirdly, under the Scheme, claims handling and contracts with garages for repair works and parts (“claims handling”) are, as it were, subcontracted by NIG to Crystal, and by Crystal to Viscount, and, finally, by Viscount to WHA.

Fourthly, the Scheme was set up in 1998, and replaced an earlier arrangement, under which NIG’s liability under the MBI policies was 100% reinsured by Practical, which in turn retroceded 100% of its liability to Warranty, and the claims handling was subcontracted by NIG directly to Warranty. Thus, the two main differences between the Scheme and the predecessor arrangement were (a) the involvement of a second Gibraltar company (Viscount) as an 85% retrocedent rather than the English claims handler (Warranty/WHA) as a 100% retrocedent, and (b) a claims handling contractual “chain” (through what the Tribunal called the “Gibraltar loop”), which included Viscount, from NIG to the ultimate claims handler (WHA), as opposed to a direct contract between NIG and the claims handler (Warranty).

To summarise the above, the motor breakdown policies were issued to members of the public by an English company (N). N reinsured its liabilities with a Gibraltar company (C) which in turn retroceded 85 per cent of the reinsurance to V (also a Gibraltar company). V contracted with the first respondent English company (W) to instruct garages to carry out any works required to be effected under the policies and to pay for those works. The garages rendered invoices to W and VAT was payable on those invoices. W rendered an invoice to V that W contended was exempt from VAT. On that basis W was able to claim repayment from the commissioners of the input tax.

Alternatively if VAT was chargeable on W’s invoice to V, V contended that it was entitled to recover the VAT it had to pay in respect of the invoice from W. As noted by his Lord Neuberger: V, C and W were all part of the same group of companies. HMRC sought to strike down the scheme on the basis that it amounted to an abusive practice under EU law. For HMRC in ordinary circumstances an insurer who provided in the European Union insurance services that were exempt for VAT purposes could not recover input tax attributable to those services, and that if the effect of the scheme was to make input tax incurred in the provision of exempt insurance services recoverable then it was contrary to the legislative purposes of Directive 77/388 (on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment).

Allowing HMRC’s appeal Lord Neuberger of Abbotsbury held that:

  • Applying Halifax it was contrary to the principle of fiscal neutrality to allow taxable persons to deduct input VAT even though in the context of their normal commercial operations no transactions conforming with the deduction rules of the Directive or of the national legislation transposing it would have enabled them to deduct such VAT. Whilst Gibraltar companies, namely V and C, were involved in the chain, the provision of the services comprising the repairs and parts were provided in the EU to W, and what W provided, albeit through two Gibraltar companies in the same group, was the provision of claims handling in the EU to a supplier of exempt services in the EU, namely N. Ex facie the VAT regime would plainly require that arrangement to result in an overall liability to VAT equal to the tax chargeable on the services, rather than, as resulted from the scheme, no net liability to VAT whatsoever. The fact that some of the steps in the scheme involved transactions that fell within Article 17(3) of the Directive, as opposed to Article 17(2), did not affect the application of the abuse principle explained in Halifax. In considering the application of the principle in Halifax the steps in the scheme could not be considered separately: the point of the abuse principle was that, although each step worked, the overall effect was unacceptable. So at [22], in answering the question whether the Scheme or part of it was contrary to the purpose of the Sixth Directive? Lord Neuberger held that “the whole point of the principle is that, although each step of the scheme in question works, the overall effect of the scheme is unacceptable.”
  • Moreover, applying Halifax in order to establish abuse, tax saving had to be the sole purpose of the transactions at issue. In the light of the findings of the tribunal, the sole purpose of the scheme, and in particular the retrocession arrangement between C and V and the creation of the claims handling chain so as to include V, was to avoid or at any rate minimise any net liability to VAT by enabling the input tax paid by W to be reclaimed by W or, as it turned out, V. Under Halifax it was necessary to consider primarily the aspects of the scheme that were artificial and had no commercial purpose. Therefore, Lord Neuberger [24] held that the question of purpose was to be judged objectively and not subjectively, i.e. by reference to the terms of the scheme concerned and the commercial realities, not by reference to what the parties concerned say their intention was (or what their subjective intention is found to have been).
  • The finding of abuse did not offend against the principle of freedom of establishment.
  • The abuse principle could be invoked even though the scheme succeeded in avoiding VAT because of the provisions of domestic law rather than EU legislation.
  • The scheme resulted in a tax advantage antithetical to the purposes of the Directive and that advantage was the essential aim of the transactions. Therefore, the two requirements identified in Halifax were satisfied. In the circumstances it was not necessary to seek to “redefine” the scheme, since W had paid the input tax and the commissioners had not refunded either C or V and therefore nothing remained to be done.



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