Pendragon - UK Supreme Court finds that a scheme, which exploited a VAT rule intended to avoid double-taxation so as to avoid a single level of tax, was abusive

The Pendragon Group used a scheme, which KPMG had designed to exploit a special VAT "margin" rule applicable to sales of second-hand goods, so that VAT was only applicable to its profit margin over the cars’ cost when it resold demonstrator cars, rather than on the full sale price.

Halifax plc v CEC, [2006] EUECJ C-255/02 had established that under the VAT abuse-of-law doctrine, an abuse can be found if "the transactions concerned, notwithstanding formal application of the [detailed provisions]…result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions," and it is "apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage."

After noting that the VAT "broad principle is that tax on the ultimate value of the product is levied only once," Lord Sumption found that "the effect of the KPMG scheme was to enable the Pendragon Group to sell demonstrator cars second-hand under the margin scheme in circumstances where VAT had not only been previously charged but fully recovered…[so that a] system designed to prevent double taxation on the consideration for goods has been exploited so as to prevent any taxation on the consideration at all."  The scheme failed.

Given the significance accorded in both Halifax, and across the ocean in Canada Trust, Lipson and Copthorne, to the purpose of the legislative provisions which have allegedly been abused, and the potential persuasiveness of an argument that the scheme of the GST legislation, like that of the VAT, is to impose a single level of tax from lumberjack to bed frame sale, Pendragon potentially may provide support for considering that transactions of Canadian registrants, which are crafted to result in net GST being imposed (at whatever stage) on less than all of the commercially-added value respecting a good or service which ultimately is consumed, are abusive under GAAR.

Neal Armstrong. Summary of HMRC v Pendragon plc, [2015] UKSC 37 under ETA, s. 274(4).