Finally, after over a decade of litigation, a case between HMRC and a trader had been laid to rest.  A trader, Paul Newey, trading as Ocean Finance, was originally set up as a partnership between him and another person and engaged in loan broking services.  They would search for people wanting loans and would then provide the necessary details to finance providers.  The commissions they received were exempt from VAT meaning that they couldn’t reclaim VAT on any supplies to the partnership that was UK based.  One of the main costs the partnership incurred was on advertising and these services were subject to VAT at the standard rate.

The two partners took advice and incorporated a company in Jersey, a new company was later established when the other partner was bought out but this is immaterial to the case.  This company then contracted with a Jersey advertising agency, who subsequently contracted with a UK advertising agency to receive the advertising services that the UK agency provided.  As the Jersey agency was based outside of the EU for VAT purposes the UK agency could zero rate its charges to the Jersey agency, thereby saving substantial irrecoverable VAT.

The Jersey company initially owned by the partners acquired a licence from the Office of Fair Trading and the Jersey company then sent the necessary details to the providers of finance who were based in the UK.  The Jersey company was entitled to the commission from the UK providers of finance.  The Jersey company employed its own staff, had its own directors and office space, provided by their Jersey based accountants although the operations were insignificant in comparison to the UK operations that provided services to the Jersey company under a services agreement.

The input VAT saved was in the region of £10m.  HMRC issued a notice to the partnership stating the VAT saving was not allowed as the Jersey operation was an artificial construct.  The taxpayer appealed with the First-tier Tribunal (FTT) finding in the taxpayer’s favour, HMRC appeal to the Upper Tribunal and then to the Court of Appeal.  The Court of Appeal did find some errors in law and remitted the case back to the FTT who have finally ruled on whether the Jersey operations were a sham and/or wholly artificial and therefore an abuse of law.

The FTT have found that the Jersey operations were not a sham, the Jersey company did in fact employ people, rent office space and make its own independent decisions and that the taxpayer had not abused the law.  To structure his affairs in a tax efficient manner was his prerogative as a taxpayer.

The decision can be found at: The Finance & Tax Tribunal (tribunals.gov.uk)

This long-running saga is finally over, and the taxpayer can breath a sigh of relief.  This case highlights that effective tax planning can be financially beneficial where implemented correctly.  The taxpayer had ensured the operations in Jersey were suitably established and staffed so they reflected the commercial reality of the Jersey operations.

Please do contact us if you have any questions with VAT.  We can advise on the appropriateness of any scheme you may be considering.