The Commissioners for Her Majesty’s Revenue and Customs v Weald Leasing Ltd.
Date: 2010-12-22
10. Weald Leasing’s trading activity consists in purchasing the assets in question and then leasing them out.
11. Suas Ltd (‘Suas’) is a company owned by a VAT consultant to the Churchill Group and his wife but is not part of that group. Its only significant trading activity is leasing assets from Weald Leasing and then subleasing them to CML and CARC.
12. When CML or CARC needed new equipment, it was purchased by Weald Leasing, which leased it to Suas, which, in its turn, subleased it to CML or CARC.
13. By resorting to that series of transactions, CML and CARC avoided having to purchase outright the equipment they needed or to pay in a single sum the total amount of non-deductible VAT on those purchases.
14. The aim of those transactions was to divide and spread the payment of that amount in order to defer the Churchill Group’s VAT liability.
15. CML and CARC were not immediately liable for the non-deductible VAT on the total cost of the equipment purchased, but on the amount of rent relating to that equipment, spread over the term of the leasing agreements.
24. In those circumstances the Court of Appeal of England and Wales (Civil Division) decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:
‘(1) In circumstances such as those that exist in the present case, where a largely exempt trader adopts an asset leasing structure involving an intermediate third party, instead of purchasing assets outright, does the asset leasing structure or any part of it give rise to a tax advantage which is contrary to the purpose of the Sixth Directive within the meaning of paragraph 74 of the [j]udgment in … Halifax [and Others] ?
(2) Having regard to the fact that the Sixth VAT Directive contemplates the leasing of assets by exempt or partly exempt traders, and having regard to the Court’s reference to “normal commercial operations” in paragraphs 69 and 80 of the [j]udgment in Halifax [and Others]  and 27 of [the judgment in] Ampliscientifica [and Amplifin]  and also to the absence of any such reference in the [j]udgment in … Part Service , is it an abusive practice for an exempt, or partly exempt, trader to do so even though in the context of its normal commercial operations it does not engage in leasing transactions?
(3) If the answer to question 2 is yes:
(a) what is the relevance of “normal commercial operations” in the context of paragraphs 74 and 75 of the [j]udgment in Halifax [and Others] : is it relevant to paragraph 74 or to paragraph 75 or to both;
(b) is the reference to “normal commercial operations” a reference to:
(1) operations in which the taxpayer in question typically engages;
(2) operations in which two or more parties engage at arm’s length;
(3) operations which are commercially viable;
(4) operations which create the commercial burdens and risks typically associated with related commercial benefits;
(5) operations that are not artificial in that they have commercial substance;
(6) any other type or category of operations?
(4) If the asset leasing structure or any part of it is found to constitute an abusive practice, what is the appropriate redefinition? In particular, should the national court or the tax collecting authority:
(a) ignore the existence of the intermediate third party and direct that VAT be paid on an open market value of the rentals;
(b) redefine the leasing structure as an outright purchase; or
(c) redefine the transactions in any other way which either the [national] court or the tax collecting authority considers to be an appropriate means by which to re-establish the situation that would have prevailed in the absence of the transactions constituting the abusive practice?’
The questions referred
The first and second questions
26. It should be recalled that the application of EU legislation cannot be extended to cover abusive practices by economic operators, that is to say, transactions carried out, not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for under EU law and that that principle of prohibiting abusive practices also applies to the sphere of VAT (see Halifax and Others , paragraphs 69 and 70, and Ampliscientifica and Amplifin , paragraph 27).
27. On the other hand, a trader’s choice between exempt transactions and taxable transactions may be based on a range of factors, including tax considerations relating to the VAT system. Where the taxable person chooses one of two transactions, the Sixth Directive does not require him to choose the one which involves paying the higher amount of VAT. On the contrary, taxpayers may choose to structure their business so as to limit their tax liability (see Halifax and Others , paragraph 73, and Part Service , paragraph 47).
29. First, notwithstanding formal application of the conditions laid down in the relevant provisions of the Sixth Directive and in the national legislation transposing it, the transactions concerned must result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions (see Halifax and Others , paragraph 74, and Part Service , paragraph 42).
30. Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage. The prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages (see Halifax and Others,  paragraph 75, and Part Service , paragraph 42).
31. As regards the main proceedings, the decision making the reference states that the essential aim of the leasing transactions at issue in the main proceedings was to obtain a tax advantage, namely spreading the payment of the VAT on the purchases in question, so as to defer the Churchill Group’s VAT liability.
42. In that context, Weald Leasing’s argument that the principle of prohibiting abusive practices does not apply to breach of Paragraph 1 in Schedule 6 to the VAT Act 1994 because that provision is purely a question of national law cannot be accepted, because that provision was adopted on the basis of Article 27 of the Sixth Directive and forms part of the national legislation implementing that directive.
48. In that regard, it should be borne in mind that, where an abusive practice has been found to exist, the transactions involved in it must be redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice (see Halifax and Others , paragraphs 94 and 98).
52. In that context, the redefinition by that court must go no further than is necessary for the correct charging of the VAT and the prevention of tax evasion (see, to that effect, Halifax and Others , paragraph 92).