UK guidance on VAT structures without economic basis
Following the European Court Ruling on the Newey Ocean Finance case, the UK VAT office, HMRC, has produced an updated briefing on the how it views the creation of artificial corporate structures primarily constructed to avoid VAT.
UK VAT authorities pursue underlying economic rational
Ocean Finance was a company providing UK VAT exempt loan arrangement services to borrowers. This mean that the company could not recover input VAT suffered on its own costs. To overcome this, the company set up a branch in the Channel Islands to conclude the VAT exempt contracts. Ocean Finance then charged the branch with service charges, which are liable to VAT and so could then recover the UK input VAT.
HMRC took the view that this was an artificial construct designed to gain a tax advantage. It took the case to the European Court of Justice, and won.