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In a significant victory for the taxpayer, the Court of Appeal handed down judgment today in Pendragon v HMRC, a case concerning alleged VAT avoidance. The judgment is notable both for reinforcing the Pringles principle that an appellate court should be slow to interfere with evaluative findings of a first-tier tribunal and for indicating that the principle of abuse should be applied cautiously and only to those cases where it is really clear on the facts that the essential aim is to obtain a tax advantage.
The Pendragon Group is the largest car sales group in Europe. It implemented a scheme for obtaining finance from a Jersey bank which involved the use of cars as securitisation in such a way that a VAT advantage was also obtained. HMRC contended that the scheme was wholly artificial, did not reflect economic reality and was set up with the sole or essential aim of obtaining an illegitimate tax advantage. That advantage was that the Pendragon Group was able to recover all of the input tax incurred on the purchase of the cars from the manufacturer, but was able to apply the margin scheme to the eventual sale of the cars to a retail purchaser. The First-Tier Tribunal, after a lengthy hearing with cross-examination of the key witnesses and expert evidence, did not accept this contention, holding that the essential aim of the transactions was to obtain finance, but the Upper Tribunal held that the FTT had erred in law in this respect, and that the essential aim was to obtain an illegitimate tax advantage. The principal question on the appeal to the Court of Appeal was whether, in doing so, the Upper Tribunal went beyond what is properly open to an appellate court or tribunal where facts have been found and evaluated by the court or tribunal from which the appeal is brought.
The Court of Appeal held that the Upper Tribunal should not have interfered with the decision of the First-Tier Tribunal. The Upper Tribunal had evidently taken a different view on the essential aim of the scheme but in the absence of any error of law, there was no basis for the Upper Tribunal to substitute its decision for that of the First-Tier Tribunal. The Court of Appeal also observed that given the various ways in which the abuse principle has been formulated by the European Court, the courts should adopt “a cautious approach as regards finding that the principle does apply, in any case which is not really clear on its facts“.
Click here to read the full Pendragon v HMRC judgment.
Valentina Sloane, instructed by KPMG, acted as junior Counsel for the taxpayers.