Cussens – European Court of Justice describes leases that were entered into in order to trigger a taxable supply at a favourable level of VAT as having “no commercial reality”

Halifax plc v Customs and Excise Commissioners [2006] EUECJ C-255/02, [2006] STC 919, established the European VAT tax avoidance doctrine that:

[I]n the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.

…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. ….[T]he prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages.

Some Irish taxpayers, who had constructed holiday homes, leased the homes shortly before sale to a related company, which then leased the homes back to the taxpayers. These leases were then mutually surrendered before the sales, and the taxpayers took the position that the sales were not subject to VAT because there already had been a taxable supply of the homes (under the lease).

The European Court of Justice confirmed that, in applying the second Halifax test, regard was to be had only to the objective of the leases preceding the sales of the homes, rather than of the joint objective of those leases and sales as a whole. In commenting on what might be found to be the purpose of the leases, the Court stated:

…[T]he leases … had no commercial reality and were entered into … with the aim of reducing the VAT liability on the sales of immovable property … which they envisaged carrying out subsequently. As regards the fact that, as the appellants… have contended…, those leases were intended to achieve the sales in the most tax efficient way, that objective cannot be regarded as constituting an aim other than obtaining a tax advantage, as the desired effect was to be achieved specifically by a reduction of the tax liability.

Neal Armstrong. Summary of Cussens & Ors v Brosnan, Case C‑251/16, [2017] BVC 61 (European Court of Justice, 4^th Chamber) under ETA s. 274(4).