19055

Applications – opposed motion to sist part of the proceedings in the appeal pending an ECJ Decision:  Application for an order for disclosure of documents – necessity of documents, relevance to issue reasonableness of request.  Applications refused.

EDINBURGH TRIBUNAL CENTRE

	RBS DEUTSCHLAND HOLDINGS GMBH	Appellants

	- and -

	HER MAJESTY’S REVENUE AND CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  T Gordon Coutts, QC

Sitting in Edinburgh on Tuesday 26 April 2005

for the Appellants		Roderick Cordara, QC

for the Respondents	Kenneth Parker, QC

© CROWN COPYRIGHT 2005.

DIRECTION

The Tribunal heard Counsel on the Respondents applications in this matter for a partial sist of proceedings and for an order under Rule 20(3) for production of documents listed in an application dated 22 March 2005.  The appeal was lodged with the Tribunal on 9 July 2004 against a decision of HM Revenue & Customs dated 22 August 2003 ruling against payment to the Appellant of input tax.  There was also an assessment of the same date against which the Appellants appeal.

Procedurally this appeal has had a somewhat chequered history.  Reference is made to the decision of this Tribunal dated 16 November 2004 refusing an application by HM Revenue & Customs to transfer the appeal to the London Tribunal Centre.  There was some discussion on that matter when that application was heard and in the result, in the decision of the Tribunal it was indicated that only a short period of time would be required for the appeal and that it could be heard within a matter of months.  An application for disclosure was lodged by the Respondents dated 17 January 2005 which was modified in the application dated 22 March with which this Hearing was concerned.  The Appellant had previously on 11 March 2005 served a Skeleton Argument in relation to the full appeal which was due to commence on 16 March 2005.

Both of the Respondent’s applications were opposed by the Appellant.

Factual Background
It is necessary to consider the factual background and contentions of the parties before deciding upon any exercise of discretion either to sist part of the proceedings or to make a Direction under Rule 20(3).

Rule 20(3) provides amongst other things that a Tribunal may where it appears necessary for disposing fairly of the proceedings on the application of a party to an appeal direct that the other party to the appeal shall serve at the appropriate Tribunal Centre for the appeal within such period as it may specify a list of the documents or any class of documents which are or have been in his possession custody or power relating to any question and issue in the appeal and may at the same time or subsequently order a party to make and serve an affidavit verifying such list.

As enacted the making of such an order is one for the discretion of the Tribunal after a consideration of whether it appeared to it necessary for disposing fairly of the proceedings. 

These were the relevant facts, as they were placed before the Tribunal at this stage:

The Appellant is a German company.  It has its offices at Frankfurt am Main.  It forms part of the Royal Bank of Scotland corporate group.  It is registered for VAT in Germany.  It is also registered for VAT as a non-established trader in the UK [674 3878 86].

The input tax in issue is the input tax on 192 new cars, which was incurred by the Appellant when it purchased those cars in the course of its business in or about 2001-2.

Part of this input tax was originally repaid by HM Revenue & Customs to the Appellant.  It is now the subject of a ‘claw-back’ assessment under VATA s.73.  The balance has been withheld by HM Revenue & Customs.  The underlying issues of law are common to both tranches of disputed input tax.

The cars were purchased new by the Appellant from suppliers in the UK.  The Appellant paid output tax of £314,054.17 on them to the suppliers.  This was presumably accounted for by the suppliers to HM Revenue & Customs.  Those cars were thereafter used in the Appellant’s business.

The cars were bought by the Appellant in the knowledge that they would be sold by it in due course (in no more than two years).  In every case such sale has now taken place in the UK.  Such transactions occurred in the course of the Appellant’s business.  Output tax in relation to those sales has since been accounted for to HM Revenue & Customs.

Between acquisition and sale, the cars were used for the purposes of leasing transactions which occurred physically in the UK.  It is not disputed that for VAT purposes (i.e. under the place of supply rules in Art 8 of the Sixth Directive) they occurred in Germany.  Such transactions occurred in the course of the Appellant’s business.

The Respondents Arguments
Despite there being 3 apparent arguments in the Statement of Case only two were deployed before the Tribunal for consideration in the matter of the exercise of discretion.

HM Revenue & Customs’ “preferred analysis” was that the Appellant had no entitlement to credit for input tax incurred on the purchase of the car because the input tax was not used for taxable transactions.  The cars in question were in fact the subject of taxable transactions when they were sold at the end of the lease period but HM Revenue & Customs argued that that was not a material consideration.

The non-preferred contention for HM Revenue & Customs was that the Appellants were not entitled to claim the recovery of the input tax in question because there had been what they called an abuse of rights.

Assuming, but without deciding and without expressing any opinion on the soundness of the argument that the way in which transactions are structured as opposed to their genuineness or reality could ground a contention based upon a theory of abuse of rights the matter for the Tribunal at this stage was whether that part of the appeal be sisted pending the outcome of the proceedings before the ECJ in Halifax and Others.

By the stage this matter reached the Tribunal the Advocate General had delivered an opinion in that case on 7 April 2005.  Again without affirming that his opinion would necessarily be followed it contains strong indications that a key question is whether there was an economic justification for the activity under scrutiny other than that of a tax advantage (para 87).  Further the Advocate General said, (para 89) the prohibition of abuse as a principle of interpretation is no longer relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages against tax authorities.  Earlier in his opinion the Advocate General said, (para 84) there is no legal obligation to run a business in such a way as to maximise tax revenue for the state.  The basic principle was that of freedom to opt for the least taxed route to conduct business in order to minimise costs.  In para 56 the observation was made that there was in principle no single normal way to conduct an economic activity.  There is nothing abnormal in itself, for example, in a banking company making use of interposed investment and development companies to carry on construction services instead of contracting directly with construction companies.

In the light of those observations, none of which are in the smallest way startling, the attempt in the present case to create an argument on abuse of rights in respect of transactions on their face for the purchase, lease and sale of goods which actually exist, facts conceded by the Respondent in paragraph 2 of the Statement of Case, might appear to have a slender foundation.  On that basis alone there is little justification for sisting part of the appeal.

Matters however do not end there.  This Tribunal would only sist proceedings against the wish of one of the parties pending a decision in another court where that decision would be determinative of the issues before the Tribunal.  That does not appear clearly to be the case.

Moreover the question for the Tribunal on that aspect of the case appears to be whether HM Revenue & Customs have put forward a prima facie case that the transactions were in themselves artificial as opposed to being constructed in a different and economically effective way.  They have not.  One suggestion made was that because a lease was for two years was unusual (so ran the argument) that could show an abuse of right.  I found that proposition startling.

There is in the view of the Tribunal no reason why there should be any further delay for the Appellant on this matter.  If on the facts available and apparent in the correspondence already produced the transactions require to be accepted as genuine no question of abuse of rights could ever arise.  If the transactions were not genuine HM Revenue & Customs would require to establish that, but there is no indication that they have even applied their minds to anything other than the legal issue which they set out in their “preferred analysis”.

Indeed it is difficult to see in relation to the underlying facts of the entire appeal that there can be any substantial dispute on the facts as opposed to law.  The case and the arguments upon it can be presented to the Tribunal without any consideration of Halifax.  If HM Revenue & Customs’ first contention is correct no question of abuse of rights arises.  

Request for Disclosure and Production of Documents
In argument to persuade the Tribunal to order the production of the documents specified Mr Parker drew attention to the way in which matters proceeded at the Hearing before the Tribunal in Halifax.  There it was apparent that there was a body of evidence written and oral presented and the Tribunal found facts therefrom.

Halifax however was a very different case and involved wholly different considerations.  In the first place it was a transaction involving transfers of rights in land which appeared to have no commercial basis or rationale other than the avoidance of tax.  It was an artificial avoidance scheme.  On the face of it the Halifax Tribunal did not require to concern itself with any “substantial body of evidence” relating to the coming into being of the scheme.  The artificiality of the transaction spoke for itself when viewed objectively.  The Tribunal did hear that evidence but the fact that it did is no reason to assume that it is necessary to do something similar in every case.  The Tribunal can look at the transaction in question and, provided the matters are clear as to what happened and with what, the Tribunal has no concern with any preliminary discussions, or any thoughts, secret or public, in the members of the board of the company and/or their professional advisors.  It matters not what advice was given.  If there is objectively no substance in the transaction it is artificial.  If it has economic reality whether the board or its advisers perceived a tax advantage has no relevance.

In the present case Mr Cordara contended the realities were, that all that needs to be known about the events is known and no extensive costly and time wasting exploration of peripheral documents can assist.

The Documents Sought
The final version of the Respondents request was substantially modified and expressed more clearly than in various other earlier attempts.  Each and every one of the 8 chapters of the request were objected to on the general ground that they were too widely framed and not in any event relevant to the true issue before the Tribunal.

The true issue is whether the transactions are such as to fall foul of the Respondents preferred analysis.

In that regard, the documents asked for have no obvious relevance.  They are an attempt to find something which might show some subjective consideration in relation to tax in the arrangements.  Accordingly in this case advice, records of meetings, calculations (para vi), discussions between the Appellant and its customer are not necessary.  Advice is irrelevant, the actings are relevant.  The various requests are in any event not specifically focussed, involve third parties, and are so generally framed as to preclude any consideration of the appropriateness of the recovery of any of them.

No Scottish Court would ever grant an order on the wide and general terms sought, even if it might be relevant to some issue between the parties, and nor will a Tribunal operating in Scotland.

Conclusion
The Tribunal agreed with the contentions of Mr Cordara and decline to sist any part of the application of the appeal and further refuse to make an order in relation to the production of further documents.  The Tribunal would only observe that if documents are thought to be essential by HM Revenue & Customs in order to form a view about a transaction they have ample powers to require the production of such documents prior to the making of any assessment and the matter coming before the Tribunal on appeal.  The Tribunal is not to be used as a means of attempting to acquire information particularly where the interest of those parties, not parties to the appeal are involved.  The purpose of the rule requiring disclosure and production of documents applies when matters have reached a stage where the documents are necessary, not to see whether there can be a case to be constructed, but in order to assist at the Hearing of a specific case..

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  3 MAY 2005

EDN/04/77