UK Tax Tribunal Rules on ‘Abusive’ Process Devised to Avoid VAT

In the recent case of Julian Massey and Beryl Massey T/A Hilden Park Partnership v HMRC [2013] the First-tier Tax Tribunal (FTT) ruled that a process to avoid paying Value Added Tax (“VAT”) on suppliers of sporting service was ‘abusive’. The Tribunal held that these services would have attracted VAT and that the doctrine of abuse of rights should apply in order to prevent tax avoidance.  The Tribunal found that the appellants wrongfully avoided paying VAT by claiming that two companies were purportedly non-profit entities.    

Facts of the Case: Julian Massey and Beryl Massey T/A Hilden Park Partnership v HMRC [2013]

The case concerns two appellants, Hilden Park Partnership (HPP) and Hilden Park LLP (LLP) who were in partnership together and owned a golf course in Kent.

In the early 1990s, Mr Julian Massey purchased a plot land with the view to developing a golf course. He entered into a partnership with a company known as Borg Developments Limited.  In 2001, after receiving tax advice, HPP let the golf course to two non-profit companies, namely Hilden Park Members Limited (HPML) and Hilden Park Visitors Limited (HPVL). Both companies were limited by guarantee and both had two directors.

The appellants which traded as Leisure Management Limited agreed to provide services to HPML and HPVL, with particular emphasis on operating common areas and collecting green fees as agents for the companies. The fees for this service amounted to £40,000 per year. The annual rent for the golf course, which was payable by the companies to the appellants, amounted to £364,250 which was 50% of the companies combined turnover.

HMRC assessed the appellants for VAT on the basis that their business structure constituted an abuse of process and the company should not be tax exempt. The appellants disagreed with HMRC’s assessment and appealed to the FTT.

The  appellants’ case in this regard is that the arrangements entered into fall a long way short of what could fairly be described as abuse. The appellant argued that HMRC had published guidance stating that it was possible to adopt a structure with a non-profit making company and therefore their business structure should fall within the tax exemption.

UK FTT’s Decision: VAT Tax Evasion

The Tribunal dismissed the appeal, under the Halifax principle, namely that the business structure carried out abusive tax advantages and therefore should not be exempt from VAT. The Tribunal stated that the law explicitly provides that some supplies of sporting services will be exempt and others will be taxable.

The Tribunal confirmed that as a general rule, the right for an individual to play golf or use health facilities will amount to a taxable supply. However, where that right is conferred to an individual by “an eligible body”, the supply is exempt from VAT.

The Tribunal stated:

“There would be an abusive tax advantage if the appellants received covert profits from a company which made supplies which were treated as exempt on the basis that it was non-profit making. It would be abusive because the legislation only intended exemption to apply to truly non-profit making taxpayers.”

In this case the business arrangement had meant that the company was not truly a non-profit organisation. The Tribunal went one step further and stated that, under certain circumstances, there can be abuse of process even if the structure used by appellants and was itself abusive.

Conclusion: Abuse of Process & VAT Evasion

This decision clearly illustrates that only truly non-profit organisation can be exempt from VAT. The burden of proof is on the taxpayer to establish a prima facie case, which HMRC would have to successfully challenge. In any event, this case demonstrates that if companies wish to fall under a tax exemption, proper investigation of the company’s affairs, structure and business arrangements must be carried out to ensure that there is no abuse of process.

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