Pendragon Plc and Others v HM Revenue and Customs: CA 23 Jul 2013

The Revenue had imposed a penalty on the appellants saying that their arrangement for the sale and VAT taxation of demonstrator cars was, in European law terms. The taxpayer sought re-instatment of the First Tier Tribunal judgment in its favour.
Held: The appeal succeeded: ‘the First-Tier Tribunal was entitled, on a comprehensive objective evaluation of the arrangements, to come to the conclusion that no element of the arrangement was inserted artificially, and that the arrangements were not abusive or artificial.’
Lloyd LJ summarised the scheme: ‘Step 1. Pendragon plc, having bought new cars from, say, Ford, sold new cars which were destined for use as demonstrator cars, before sale to a consumer, to Captive Cos 1, 2, 3 and 4 (‘the Captive Leasing Companies’ or CLCs). (In fact only three companies were used, but I use the language which has been used elsewhere to describe the Scheme, in order not to generate unnecessary confusion.) Pendragon plc’s sale of the cars to a CLC was a taxable supply of goods for VAT purposes. Therefore, Pendragon plc accounted for output tax on the sale of the cars; and reclaimed input tax, including the tax incurred on the purchase from Ford.
Step 2. On the same day as Step 1, the Captive Leasing Companies leased the cars pursuant to hybrid HP/lease agreements to dealership companies in the Pendragon Group (‘the Dealerships’). Each of the Captive Leasing Companies entered into a ‘Vehicle Demonstrator Hire Agreement’ (referred to as a hybrid lease) in favour of the Dealerships. Paragraph 8(c) of Second Schedule to the hybrid leases (generally referred to as clause 8(c), as I will refer to it hereafter, so as to avoid confusion) conferred on the Dealership an option to purchase the hired vehicles. The option was exercisable seven days after the end of the hire agreement, and not earlier.
The services provided by the Captive Leasing Companies to the Dealerships under the Vehicle Demonstrator Hire Agreement were taxable supplies at the standard rate of VAT. Input tax incurred by the Captive Leasing Companies on the purchase of the vehicles from Pendragon plc at Step 1 was therefore fully recoverable, being attributable to the making of those taxable supplies of leasing to the Dealerships. The Dealerships incurred VAT on the rental payments but recovered that VAT in full, being attributable to their taxable sale activities.
Step 3. On the day following Steps 1 and 2, the Captive Leasing Companies began assigning the hybrid lease agreements and title in the cars to SG Hambros Bank and Trust (Jersey) Ltd, known in the case as Soc Gen Jersey (SGJ), which was resident in Jersey, not in the UK. Each of the Captive Leasing Companies entered into a Deed of Assignment with SGJ. SGJ paid the Captive Leasing Companies the sum of approximately andpound;20m. On the same date, SGJ had entered into a facility agreement with its parent company in the UK, SG London, in relation to the facility of andpound;20m to finance the assignments. SGJ granted SG London an assignment of the assets to be assigned to it, as a form of security.
This step was critical to the success of the Scheme. It depended on the assignment of a lease, granted by a Captive Leasing Company to a Pendragon dealership, to a bank; according to HMRC this had to be an offshore bank, as it in fact was. No VAT was due on this transaction. The assignment by the Captive Leasing Companies to SGJ was not a supply for VAT purposes, by virtue of article 5(4) of the Special Provisions Order, which ‘de-supplied’ it, ie treated it as neither a supply of goods nor a supply of services.
Step 4. On a date envisaged as being some 30 to 45 days later, SGJ transferred as a going concern the lease agreements and title in the cars to Captive Co 5. Captive Co 5 resolved to purchase the relevant ‘hire business’ carried on by SGJ. On the same day, SGJ contracted with Captive Co 5 to sell to it the business of the hire of cars said to have been carried on by SGJ. The consideration was in excess of andpound;18m and was apportioned as to andpound;100,000 for the sale of goodwill and as to the balance (save for andpound;2) for the sale of the motor vehicles. That agreement was completed on the same date, and Captive Co 5 paid the agreed price to SGJ.
The sale by SGJ to Captive Co 5 of its ‘hire business’ was the transfer of a business as a going concern (TOGC). As such the transaction was neither a supply of goods nor a supply of services; therefore no VAT was due on this transaction.
Step 5. On various dates thereafter, the cars were sold to customers by the Dealerships, acting as undisclosed agents for Captive Co 5 in which title to the vehicles was vested. VAT was charged to the purchasers on the seller’s profit margin on the sale, rather than on the total sale price, Captive Co 5 having opted to apply the margin scheme.
When Captive Co 5 sold the vehicles to the retail customer, the Cars Order applied. The tax relief provided for by article 8 of that Order applied only where the taxable person making the sale had come into possession of the car in the circumstances set out in article 8(2), which I will set out below. If those requirements were met, and if the option was exercised that the margin scheme should apply, then VAT was due only on the profit margin on the supply, rather than on the whole value received for the supply. This meant that Captive Co 5 accounted for VAT on the difference between the cost of the car on the purchase from SGJ, and the price at which it sold the car to the consumer. By means of the de-supplied assignment of the leases to SGJ at Step 3, and the TOGC from SGJ at Step 4, the Scheme was designed to meet the taxation requirements of the Cars Order.’

Lloyd, Lewison, Gloster LJJ
[2013] EWCA Civ 868, [2014] STC 844, [2013] STI 2568, [2013] BVC 414
First Council Directive on VAT, 67/227/EEC 2, VAT (Cars) (Amendment) Order 1995 SI 1995/1269, VAT (Cars) Amendment) Order 1997 SI 1997/1615
England and Wales
Appeal fromHM Revenue and Customs v Pendragon UTTC 15-Mar-2012
UTTC VALUE ADDED TAX – margin scheme for second-hand goods – arrangement by which motor dealer raised finance and became able to sell demonstrator cars within margin scheme – whether abusive – yes – appeal . .
At FTTPendragon Plc and Others v Revenue and Customs FTTTx 31-Jul-2009
FTTTx VAT- financing involving sale of business – Abuse? No financing transaction as going concern which gave margin treatment – Appeal allowed . .
CitedHalifax plc etc v Commissioners of Customs and Excise ECJ 21-Feb-2006
ECJ Sixth VAT Directive – Article 2(1), Article 4(1) and (2), Article 5(1) and Article 6(1) – Economic activity – Supplies of goods – Supplies of services – Abusive practice – Transactions designed solely to . .
CitedMinistero dell’Economia e delle Finanze v Part Service Srl ECJ 21-Feb-2008
ECJ Sixth VAT Directive Articles 11A(1)(a) and 13B(a) and (d) – Leasing – Artificial division of the supply into a number of parts – Effect Reduction of the taxable amount – Exemptions – Abusive practice . .
CitedHM Revenue and Customs v Weald Leasing (Taxation) ECJ 2-Dec-2010
ECJ Sixth VAT Directive – Concept of ‘abusive practice’ – Leasing transactions effected by a group of undertakings to spread the payment of non-deductible VAT . .
CitedWHA Ltd and Another v Revenue and Customs SC 1-May-2013
The Court was asked as to the effectiveness of a scheme, known as Project C, designed to minimise the overall liability to VAT of a group of companies involved in motor breakdown insurance.
Held: The court dismissed WHA’s appeal. There had . .
CitedHelena Partnerships Ltd v HM Revenue and Customs CA 9-May-2012
The company had undertaken substantial building works and sought associated tax relief. The court was asked whether, following a change in the company’s memorandum and articles of association, the company, a registered social landlord, remained a . .
CitedMirror Group plc v Commissioners of Customs and Excise, Cantor Fitzgerald International v Same ECJ 9-Oct-2001
A potential lessee who did not have an interest in immovable property agreed to take a lease in return for money paid by the landlord. The transaction was not exempt from value-added tax under article 13(B)(b) as ‘the leasing or letting of immovable . .
CitedTesco Plc v Customs and Excise Commissioners CA 14-Oct-2003
The taxpayer had a loyalty scheme under which they issued vouchers to shoppers who had purchased goods to a certain value. They sought to deduct the sums when accounting for VAT.
Held: Upon earning 150 loyalty points in a quarter, vouchers . .

Cited by:
At CARevenue and Customs v Pendragon Plc and Others SC 10-Jun-2015
‘This appeal is about an elaborate scheme designed and marketed by KPMG relating to demonstrator cars used by retail distributors for test drives and other internal purposes. In the ordinary course, a car distributor will buy new cars for use as . .

Lists of cited by and citing cases may be incomplete.

VAT, European

Updated: 09 November 2021; Ref: scu.513554