19 September 2000
Internal leases
The appellants, four companies styled as RBA Leasing and Services Ltd, were members of the Royal Bank of Scotland group of companies (but not of the same VAT group), and were based in Cheltenham. They appealed against a direction issued under paragraph 1 of Schedule 6 of the VAT Act 1994.
The appellants, four companies styled as RBA Leasing and Services Ltd, were members of the Royal Bank of Scotland group of companies (but not of the same VAT group), and were based in Cheltenham. They appealed against a direction issued under paragraph 1 of Schedule 6 of the VAT Act 1994.
Internal leases
The appellants, four companies styled as RBA Leasing and Services Ltd, were members of the Royal Bank of Scotland group of companies (but not of the same VAT group), and were based in Cheltenham. They appealed against a direction issued under paragraph 1 of Schedule 6 of the VAT Act 1994.
The direction allows Customs to direct that the value of supplies made between connected persons for a consideration which is less than open market value, and where the recipient is wholly or partially exempt, should be taken as the open market value. The Royal Bank of Scotland was partially exempt, recovering some ten per cent of its input tax. During the period covered by the direction, the bank sold to each of the appellants plant and machinery, at a price equal to the cost incurred by the bank. Four companies were used with different year-ends to produce the best result for corporation tax purposes through surrender of capital allowances. The bank funded the purchase price of the assets by subscribing for three per cent preference shares in the appellants. The appellants then leased back the assets to the bank with primary periods of five years. In this way the appellants could recover the full VAT on equipment purchases, whereas the Bank itself could only recover 10 per cent of it. The tribunal referred to the leases as internal leases.
Customs said that the rent payable by the bank was less than open market rent, and issued a direction that the value of the supplies under internal leases granted by the appellants should be taken to have been the open market value.
The appellants appealed on three grounds:
? paragraph 1 of Schedule 6 is an unauthorised derogation from Article 11A of the Sixth Directive. Furthermore, the directions went beyond the limits necessary for achieving the purpose of the authorisation given by Article 27;
? the Customs officer did not consider the nature of the appellants' businesses or the nature of the supplies;
? the leases were not made for a consideration which was less than open market value, because the RBS Leasing were prepared to enter into similar leases with third parties on similar terms.
The tribunal considered the first point. It said that paragraph 1 of Schedule 6 did fall within the scope of the derogation, and that it was satisfied that the directions complied with the legal requirements of the paragraph. The purpose and scope of the derogation was clear: it enabled open market value to be taken as consideration given that two stated preconditions were satisifed. Paragraph 1 was framed no wider than the constraints imposed by the derogation. The wording of the notices of direction effectively reproduced the terms of paragraph 1 and could not be faulted.
Customs had identified the scope of the measure. The appellants' objections were too insubstantial to invalidate the making of the derogation.
Turning to Customs' understanding of the circumstances, the tribunal said that correspondence between the parties showed that the Customs officer concerned showed a consistent approach, and was well aware of the general principles. The appellants said that the Customs officer acted 'John Dee unreasonably' (John Dee v Commissioners of Customs and Excise [1995] STC 941), because he did not understand the nature of the internal leases, and took into account irrelevant material. He placed undue reliance on the tax avoidance motive, which should have been seen as a legitimate planning arrangement. The tribunal said that the scheme was clearly designed to avoid VAT, as well as to make the most of the group's capital allowances. The Customs officer seemed well aware of the concepts involved and had acted reasonably.
The appellants claimed that the leases were on proper market terms because they would have been prepared to enter into similar leases with unconnected parties on the same terms; namely those parties would need to subscribe for preference shares with nil return to provide the funding required and they would then be eligible for equipment leasing at the same rate as that provided to the bank. However, no such third party leases had ever been entered into and the tribunal was not persuaded that there was any reality here.
The appeal failed.
(RBS Leasing & Services (Nos 1, 2, 3, and 4) Ltd (16569).)
The appellants, four companies styled as RBA Leasing and Services Ltd, were members of the Royal Bank of Scotland group of companies (but not of the same VAT group), and were based in Cheltenham. They appealed against a direction issued under paragraph 1 of Schedule 6 of the VAT Act 1994.
The direction allows Customs to direct that the value of supplies made between connected persons for a consideration which is less than open market value, and where the recipient is wholly or partially exempt, should be taken as the open market value. The Royal Bank of Scotland was partially exempt, recovering some ten per cent of its input tax. During the period covered by the direction, the bank sold to each of the appellants plant and machinery, at a price equal to the cost incurred by the bank. Four companies were used with different year-ends to produce the best result for corporation tax purposes through surrender of capital allowances. The bank funded the purchase price of the assets by subscribing for three per cent preference shares in the appellants. The appellants then leased back the assets to the bank with primary periods of five years. In this way the appellants could recover the full VAT on equipment purchases, whereas the Bank itself could only recover 10 per cent of it. The tribunal referred to the leases as internal leases.
Customs said that the rent payable by the bank was less than open market rent, and issued a direction that the value of the supplies under internal leases granted by the appellants should be taken to have been the open market value.
The appellants appealed on three grounds:
? paragraph 1 of Schedule 6 is an unauthorised derogation from Article 11A of the Sixth Directive. Furthermore, the directions went beyond the limits necessary for achieving the purpose of the authorisation given by Article 27;
? the Customs officer did not consider the nature of the appellants' businesses or the nature of the supplies;
? the leases were not made for a consideration which was less than open market value, because the RBS Leasing were prepared to enter into similar leases with third parties on similar terms.
The tribunal considered the first point. It said that paragraph 1 of Schedule 6 did fall within the scope of the derogation, and that it was satisfied that the directions complied with the legal requirements of the paragraph. The purpose and scope of the derogation was clear: it enabled open market value to be taken as consideration given that two stated preconditions were satisifed. Paragraph 1 was framed no wider than the constraints imposed by the derogation. The wording of the notices of direction effectively reproduced the terms of paragraph 1 and could not be faulted.
Customs had identified the scope of the measure. The appellants' objections were too insubstantial to invalidate the making of the derogation.
Turning to Customs' understanding of the circumstances, the tribunal said that correspondence between the parties showed that the Customs officer concerned showed a consistent approach, and was well aware of the general principles. The appellants said that the Customs officer acted 'John Dee unreasonably' (John Dee v Commissioners of Customs and Excise [1995] STC 941), because he did not understand the nature of the internal leases, and took into account irrelevant material. He placed undue reliance on the tax avoidance motive, which should have been seen as a legitimate planning arrangement. The tribunal said that the scheme was clearly designed to avoid VAT, as well as to make the most of the group's capital allowances. The Customs officer seemed well aware of the concepts involved and had acted reasonably.
The appellants claimed that the leases were on proper market terms because they would have been prepared to enter into similar leases with unconnected parties on the same terms; namely those parties would need to subscribe for preference shares with nil return to provide the funding required and they would then be eligible for equipment leasing at the same rate as that provided to the bank. However, no such third party leases had ever been entered into and the tribunal was not persuaded that there was any reality here.
The appeal failed.
(RBS Leasing & Services (Nos 1, 2, 3, and 4) Ltd (16569).)
