a car insurance business has been referred to the European Court of
Justice (ECJ). This is the case of Weald Leasing v HM Revenue &
Customs (HMRC).
The appeal concerns various types of commercial equipment used
by the Churchill Insurance group in its motor accident repair
centre. As an insurer, whose own turnover is mainly comprised of
VAT-exempt premiums, the taxpayer’s parent company would generally
not be able to recover VAT paid on equipment and other purchases.
Churchill set up internal leasing arrangements designed to defer
net VAT costs over long periods.
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Under these arrangements Weald Leasing, a company controlled by
Churchill, acquired the equipment and leased it to the insurer over
ten-year periods. No substantial finance cost was built into the
lease rentals. The VAT on the lease rentals was therefore not
substantially higher than the VAT on the purchase cost of the
equipment. The leasing company itself could recover VAT, while the
insurer could not. The effect of non-recovery at group level was
therefore spread out over the lease periods rather than taken
up-front.
A third party outside Churchill’s group was interposed as
sub-lessor. This was designed to stop the use of anti-avoidance
powers available to HMRC for purely intra-group transactions.
However, HMRC argues that the whole arrangement is an “abuse of
purpose” within the meaning of an EU VAT Directive. That would give
it the power to prevent recovery of VAT by the intra-group leasing
company on the initial purchase of the equipment.
The taxpayer was successful at the first two appeal stages, in
the Tribunal and the High Court. HMRC took the case to the Court of
Appeal, and that court has now referred the EU law issues to the
ECJ.
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By GlobalDataThe formal Order of Reference to the ECJ is currently being
finalised. The eventual timetable will depend whether the ECJ
decides for an oral hearing or a paper ruling, but it will not be
concluded for several months yet.
Churchill is currently part of the Royal Bank of Scotland (RBS)
group. This means that the UK government has become the ultimate
majority shareholder of the appellant taxpayer, through the bank
recapitalisation programme. The case is nevertheless still being
contested, and RBS could soon be selling its insurance
subsidiaries.
Andy Thompson
