Flashback on ECJ cases C-223/03 (University of Huddersfield) – Taxable transactions even if carried out for the sole purpose of obtaining a tax advantage, without any other economic purpose

On February 21, 2006, the ECJ issued its decision in the case C-223/03 (University of Huddersfield).

Context: Sixth VAT Directive – Article 2(1), Article 4(1) and (2), Article 5(1) and Article 6(1) – Economic activity – Supplies of goods – Supplies of services – Transactions designed solely to obtain a tax advantage.

Article in the EU VAT Directive

Article 2(1), 4(1), 4(2), 5(1) and 6(1) of the Sixth VAT Directive (Articles 2, 9(1), 14(1), 24(1), 25 of the EU VAT Directive 2006/112/EC).

Article 9 (Taxable person)
1. ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.
Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as ‘economic activity’. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.

Article 14 (Taxable transaction – Supply of Goods)
1. ‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner.

Article 24 (Taxable transaction – Supply of Services)
1. ‘Supply of services’ shall mean any transaction which does not constitute a supply of goods.
2. ‘Telecommunications services’ shall mean services relating to the transmission, emission or reception of signals, words, images and sounds or information of any nature by wire, radio, optical or other electromagnetic systems, including the related transfer or assignment of the right to use capacity for such transmission, emission or reception, with the inclusion of the provision of access to global information networks.

Article 25
A supply of services may consist, inter alia, in one of the following transactions:
(a) the assignment of intangible property, whether or not the subject of a document establishing title;
(b) the obligation to refrain from an act, or to tolerate an act or situation;
(c) the performance of services in pursuance of an order made by or in the name of a public authority or in pursuance of the law.

Facts

According to the order for reference, the University for the most part supplies education services, which are exempt from VAT. However, as it also makes some taxable supplies, national law allows it to recover input VAT at its partial exemption recovery rate, which was 14.56% in 1996 and which has since fallen to 6.04%.
The referring tribunal observes that in 1995 the University decided to refurbish two derelict mills in which it had previously acquired a leasehold estate. Those two mills are known as West Mill and East Mill, and both are situated in Canalside, Huddersfield. Since the input VAT on the refurbishment costs would largely be irrecoverable in normal circumstances, the University sought a way in which to save tax or to defer its liability to it.
It first commissioned and paid for the works to West Mill. A discretionary trust (‘the Trust’) was established by deed of 27 November 1995. The deed included provisions vesting the power of appointment and removal of trustees in the University. The trustees appointed were three former employees of the University and the beneficiaries were the University, any student from time to time enrolled there, and any charity. On the same date, the University entered into a deed of indemnity with the trustees, whereby it indemnified them against all present and future liabilities arising out of various transactions.
The referring tribunal states that the sole reason for creating the Trust was to enable the tax saving scheme suggested in relation to West Mill to be implemented, thereby allowing the University to recover VAT on the refurbishment costs.
With respect to East Mill, which is the building directly concerned in the main proceedings, the order for reference states that, under the scheme proposed by its accountants, on 21 November 1996 the University opted to tax the lease of East Mill and, on 22 November 1996, the University granted a taxable 20-year lease of it to the Trust. The lease contained an option for the University to break it on the 6th, 10th and 15th anniversaries of its commencement. The initial yearly rent reserved was the nominal amount of GBP 12.50. On the same date, the Trust, having itself opted to tax its supplies, granted a taxable underlease back to the University for a term of 20 years less 3 days, at an initial yearly nominal rent of GBP 13.00.
It is also apparent from the order for reference that, on 22 November 1996, University of Huddersfield Properties Ltd (‘Properties’), a wholly-owned subsidiary company of the University which was not part of the same VAT group for the purposes of the second subparagraph of Article 4(4) of the Sixth Directive, invoiced the University for GBP 3.5 million, plus VAT of GBP 612 500, for future construction services on East Mill. Properties contracted with the University to refurbish East Mill on 25 November 1996. On a date not disclosed, the University paid the invoice submitted by Properties. The referring tribunal states that no evidence was adduced of any intention that Properties should make a profit in providing construction services to the University, and, in the absence of such evidence, it found that the University had no intention that Properties should make such a profit.
Properties engaged third-party contractors at arm’s length to provide the necessary construction services for East Mill to the University.
In its VAT return for January 1997, the University, which had a net liability to VAT of over GBP 90 000, showed a repayment due to it of GBP 515 000, which sum the Commissioners, after verification, unconditionally paid to it, thereby allowing the University to recover the VAT invoiced by Properties.
Work on East Mill was completed by third-party contractors on 7 September 1998 and the University occupied the building on the same date. Subsequently, the rents due under the lease and underlease were increased to GBP 400 000 per annum and GBP 415 000 per annum, respectively.
The referring tribunal found that the sole reason for the use of a trust in relation to East Mill and the lease by the University to the Trust was that of facilitating the scheme for the reduction of VAT. It also found that the sole purpose of the underlease of East Mill by the Trust to the University was also that of facilitating that scheme. It found, finally, that it was the University’s intention to obtain an absolute tax saving by terminating the VAT arrangements in respect of East Mill after 2 or 3 years, or on the 6th, 10th or 15th anniversary of the commencement of the term of the lease (thereby also terminating payment of VAT on the rents).
The referring tribunal also found that all the transactions were genuine: they resulted in supplies that were genuinely made. They were therefore not shams.
By letter of 26 January 2000, the Commissioners assessed the University to VAT of GBP 612 500 for January 1997 in respect of VAT on construction services supplied by Properties in relation to East Mill. The letter indicated that the tax had been incorrectly attributed to taxable supplies and that there had been an under-declaration of VAT.
The referring tribunal states that that letter shows that the Commissioners categorised the leases with the Trust as ‘inserted steps’, which could be disregarded for determining the validity of the input VAT claims made by the University. The Commissioners accordingly found that the input VAT charged to the University by Properties had been treated incorrectly by the University in so far as it had been attributed to taxable supplies and recovered in full.
The University brought an appeal before the VAT and Duties Tribunal against the assessment of VAT notified by the Commissioners in their letter of 26 January 2000.
According to the order for reference, the Commissioners contend that a transaction entered into solely or predominantly for the purposes of VAT avoidance is not a ‘supply’. Similarly, it is not a step taken in the course or furtherance of an ‘economic activity’.
In the alternative, the Commissioners maintain that such a transaction should, in accordance with the general principle of law preventing ‘abuse of rights’, be disregarded and, instead, the terms of the Sixth Directive should be applied to the true nature of the transaction at issue.
The University argues inter alia that the transactions in question were not, as the Commissioners claimed, ‘solely or predominantly for the purpose of tax avoidance’. Whilst it is true that the University’s interpretation of the facts produced a large ‘up front’ repayment of input VAT, the same facts also gave rise to large payments of VAT over a period of time. Furthermore, even if a transaction had been entered into ‘solely or predominantly for the purpose of tax avoidance’, that simply means that the transaction is subject to any anti-avoidance rule that has been adopted by the Member State pursuant to some authorisation under Article 27(1) of the Sixth Directive. However, no such rule has been adopted by the United Kingdom.
The University considers that action may only be characterised as tax avoidance if:
- (1) the objective consequence of the transaction is contrary to the spirit and purpose of the Sixth Directive, and
- (2) the subjective intention of the trader was to bring about that result, which is not the case in the main proceedings.
The national tribunal also found that the transactions into which the University entered were carried out with the sole intention of obtaining a fiscal advantage. They had no independent business purpose. They amount to a deferral scheme with a built-in feature that allows absolute tax saving at a later date. The referring tribunal accordingly found that those transactions amounted to tax avoidance. Furthermore, the findings of fact clearly indicate that it was the University’s, and the Trust’s, subjective intention to bring about that result.

Questions

Where:

1. a university waives its right to exemptions from VAT in respect of any supplies of certain real property owned by it and leases the property to a trust set up and controlled by the university,
2. the trust waives its right to exemption from VAT in respect of any supplies of the real property in question and grants to the university an underlease of the property,
3. the lease and underlease were entered into and carried out by the University with the sole intention of obtaining a fiscal advantage and had no independent business purpose,
4. the lease and leaseback amounted to, and was intended by the University and the trust to be, a deferral scheme (that is, a scheme for the deferral of payment of VAT) with a built-in feature that allowed an absolute tax saving at a later date,
- a) are the lease and the underlease taxable supplies for the purposes of the Sixth VAT Directive?
- b) do they qualify as economic activities within the meaning of the second sentence of Article 4(2) of the Sixth VAT Directive?

AG Opinion

(1) The terms ‘economic activity’ and ‘supply’ made by a ‘taxable person acting as such’ for the purposes of Article 2 and Article 4 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment should be interpreted as meaning that each of the transactions at issue must be considered objectively and per se. In that regard, the fact that a supply is made with the sole intention of obtaining a tax advantage is immaterial.

(2) The Sixth Directive should be interpreted as not conferring on a taxable person the right to deduct or recover input VAT, in accordance with the Community law principle of interpretation prohibiting the abuse of Community law provisions, if two objective elements are found to be present in terms to be assessed by the national courts. First, that the aims and results pursued by the legal provisions formally giving rise to the right would be frustrated if the right claimed were actually conferred. Second, that the right invoked derives from activities for which there is no other explanation than the creation of the right claimed.

Decision

Transactions of the kind at issue in the main proceedings constitute supplies of goods or services and an economic activity within the meaning of Article 2(1), Article 4(1) and (2), Article 5(1) and Article 6(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, provided that they satisfy the objective criteria on which those concepts are based, even if they are carried out with the sole aim of obtaining a tax advantage, without any other economic objective.

Summary

Acts whose sole purpose is to obtain a tax advantage

Transactions such as those at issue in the main proceedings are supplies of goods or services and an economic activity within the meaning of Articles 2(1), 4(1) and 2, 5(1) and 6(1) , of the Sixth Directive, if they satisfy the objective criteria on which those concepts are based, even if they were carried out for the sole purpose of obtaining a tax advantage, without any other economic purpose.

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