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RBS Deutschland Holdings GmbH

The issue was whether the appellant was entitled to input tax credit in respect of the purchase of new cars for supply by lease and later by re-sale.

The appellant was a wholly-owned German subsidiary of the Royal Bank of Scotland Group and was registered for VAT in the UK as a non-established person. Since the company had no establishment in the UK, its leasing was treated as a service supplied in Germany and no VAT was due on the lease rental payments in the UK. However, in German VAT law the supply was one of goods, but not one made in Germany as the vehicles remained in the UK. The contrasting VAT provisions resulted in no VAT being charged on the lease rental payments in either member state. The appellant purchased new motor cars from a UK supplier which it leased to a UK customer for two years. At the end of the lease, it sold the vehicles and accounted to the commissioners in the UK for VAT on the sale proceeds. The dispute concerned the commissioners’ refusal to allow input tax deduction on the purchase of the cars by the appellant.

The argument for the appellant was that, notwithstanding the absence of a VAT charge, the supplies remained ‘taxable’ in the context of the VAT system. The commissioners, on the other hand, considered the rentals to be analogous to an exempt supply, with no entitlement to input tax deduction. The appellant's preferred analysis of the arrangements was that the leasing was a taxable economic activity and that the position was not altered by the absence of a tax levy in Germany on the rental payments. VAT was collected on a national rather than a supranational basis. Car leasing was a taxable activity throughout the European Community and the commissioners’ refusal to allow input tax recovery was an offence against the principle of neutrality of the VAT system. In respect of the commissioners’ argument on ‘abuse of rights’, the appellant submitted that for the commissioners to succeed they must be able to show that the arrangements were wholly artificial. Unlike in Halifax plc vC &E Commrs (Case C-255/02) [2006] BVC 377, there was no extra link inserted between the principals; the lessor and lessee were directly linked in an arm's-length commercial arrangement. The fact that there may be a tax advantage should not be taken into account. That no output tax was due in Germany was not a matter for the UK tax authorities to police and should not affect the administration of VAT in the UK. In the appellant's view, an absence of synchronicity between member states’ legislation on the imposition of VAT should not deny it repayment of input tax on the vehicle purchases.

The commissioners submitted that the car leasing activity fell outside the VAT system and, accordingly, the VAT incurred on the vehicles purchased was non-deductible. It was not an ‘input’ contributing to a taxable supply, irrespective of the ultimate taxable sale of the vehicles. Since no VAT was charged on the lease rentals, the leasing was not a taxable or business activity in terms of the VAT legislation. The word ‘business’ where used in VATA 1994, s. 24—26 meant the provision of taxable supplies and as no VAT was charged on the rental payments, this was not a taxable supply. In any event, argued the commissioners, the appeal should be dismissed on abuse of rights principles. They submitted that the principles established in Halifax were not restricted to cases in which there were linked transactions with intermediate links having no commercial relevance. The appellant's arrangements were structured to achieve a tax advantage and amounted to an abuse of rights.

The tribunal was not aware of any case law to the effect that the non-recovery of output tax by the tax authorities altered the taxable nature of the supply and stopped input tax deduction. The tribunal found it difficult to accept that the appellant's leasing activity should be viewed as falling wholly outside the VAT system merely because of peculiarities between the VAT systems in the UK and Germany. If the leasing were to be considered taxable, there was nothing in s. 24 or 26 that would stop deduction of input tax. In the view of the tribunal, the appellant's supplies of leasing were potentially taxable, but were not actually taxed. That procedural lacuna did not convert a taxable supply into an exempt supply or remove it from the VAT system. The appellant was entitled to input tax deduction and there was the germ of an argument that even if the leasing fell outside the VAT system the right to deduct might still exist on the basis that there was a sufficiently direct link between the purchases and the final taxable disposals.

The tribunal's findings did not determine the appeal, since the ‘abuse of rights’ issue had to be addressed. However, it was clear to the tribunal that there was no such abuse. There was an immediate contractual connection between lessor and lessee and there was nothing artificial about the contract. Commercial considerations dictated the terms and the leases were at full commercial value.

The tribunal allowed the taxpayer's appeal.

  1. The car leasing activity carried on by the appellant was potentially taxable and there was nothing which took it outside of the VAT system.
  2. The tax saving which resulted from differences in member states’ internal legislation did not amount to an abuse of rights.
  3. The VAT paid by the appellant on new vehicles purchased for leasing was recoverable as input tax.

No. 20,267