Sales, Use and International Tax Activity Update - June 2010

Dirty Deeds in Deferred VAT?

This case involves whether or not a particular leasing arrangement between related parties constitutes an abuse of VAT law. This is a UK case where a special purpose vehicle is leased to an associated taxpayer who is partly exempt. HMRC considered the leasing installments to be below market value.

The governments of the UK, Ireland, Greece and Italy took the position that the lease was an abusive practice because the intent was to defer the unrecoverable VAT over the term of the lease rather than recognize it all at once. Based on their opinion that this was essentially an outright purchase of the asset they asked the Commission to restore the VAT position that would have resulted without the lease arrangement.

The Taxpayer’s position was that the arrangement was not an abusive practice and the only redefinition that may be necessary would be to raise the value of the leasing installments to fair market value rather than disallow the lease entirely.

The Commission held that the purchase of equipment by a company and the subsequent lease of that equipment to a related company which carries on an exempt activity does not in and of itself constitute an abusive practice even if the sole purpose is to defer the financial burden of irrecoverable VAT.

An abusive practice may exist if an artificial arrangement is put in place to prevent the authorities from ensuring that property transfers between related parties are carried out at arm’s length. Where abuse is found the transactions must be redefined to re-establish the situation that would have occurred absent the abusive practice.

It is not clear whether the European Court of Justice will take the same position as the Commission.

---

Subscribe to CyberTax News and receive the latest indirect tax news, including rate changes, rule updates, compliance issues, and more, delivered directly to your email.

Email Address