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HM Revenue and Customs Brief 18/13


HM Revenue and Customs -Tax Authorities

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Issued 9 July 2013

VAT: Tax avoidance using offshore entities - European Court's judgment in Paul Newey (trading as Ocean Finance)

Purpose of this brief

This brief updates taxpayers and their advisors on the recent decision of the European Court (CJEU) in Paul Newey (trading as Ocean Finance), case C-653/11.


Businesses with VAT appeals affected by the European Court's decision in the Newey case, and their advisors. 

Action required

For information only

The issue

Mr Newey was a loan broker, established in the United Kingdom who arranged loans by UK lenders to UK borrowers. His services were exempt from VAT and as a result he could not recover VAT on advertising services supplied to him. 

In order to avoid this irrecoverable VAT, Mr Newey set up a company, Alabaster (CI) Ltd, in Jersey, and granted it the right to use the business name Ocean Finance.  Broking contracts were concluded between the lenders and Alabaster, and the broking commissions were paid not to Mr Newey, but to Alabaster. Alabaster then entered into a contract for the supply of advertising services.

HMRC took the view that, notwithstanding the contractual terms, the advertising services concerned were supplied to Mr Newey in the United Kingdom and were therefore taxable in the United Kingdom. The First Tier Tribunal allowed Mr Newey’s appeal against that decision and HMRC appealed to the Upper Tribunal, which referred questions to the CJEU.

The CJEU decided that although contractual terms should be taken into consideration, they are not decisive. They may be disregarded where they do not reflect economic and commercial reality and are a wholly artificial arrangement set up with the sole aim of obtaining a tax advantage.

It is now for the Upper Tribunal to decide the case in light of this.

HMRC's approach

The guidance from the CJEU confirms HMRC’s view that economic reality must be considered and that contractual relationships do not necessarily determine VAT issues. HMRC will continue to mount in-depth investigations where we believe that a tax advantage may have been claimed artificially.

About the Author

© Crown Copyright 2013.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.

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Article Published/Sorted/Amended on Scopulus 2013-07-16 11:15:16 in Tax Articles

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