Revenue 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 demonstrators, paying VAT on the full amount of the sale price. This will in due course be recoverable as input tax by being set off against the output tax for which the distributor was accountable on its taxable supplies. The object of the KPMG scheme was to ensure that companies in the distributor’s group were able to recover input tax paid on the price of new cars acquired as demonstrators from manufacturers, while avoiding the payment of output tax on the price at which the car was ultimately sold second-hand to a consumer.
Held: The Revenue’s appeal succeeded. The Cars Order was made with the intention of applying article 26a of the Sixth Directive to the used car market. All domestic VAT implementing legislation is made against the background of EU law, including its general principles, and on the footing that these will apply to it. It would be irrational and unworkable for the principle of abuse of law to apply to some steps in a concerted scheme of transactions but not others, depending on the degree to which the legislator’s intention to transpose the Directive was successfully achieved.
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. The result was that no net charge to VAT was ever suffered, except on the small or non-existent profits realised on the resale. 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. In that respect the KPMG scheme was contrary to the EU policy underlying the margin scheme, and that the first Halifax test was satisfied.


Lord Neuberger, President, Lord Sumption, Lord Reed, Lord Carnwath, Lord Hodge


[2015] UKSC 37, [2015] STI 1921, [2015] WLR(D) 253, [2015] STC 1825, [2015] 3 All ER 919, [2015] BVC 30, [2015] 1 WLR 2838, UKSC 2013/0197


Bailii, Bailii Summary, WLRD, SC, SC Summary, SC Video


England and Wales


At FTTTxPendragon 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 . .
At UTTCHM 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 CAPendragon 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.
CitedBLP Group v Commissioners of Customs and Excise ECJ 6-Apr-1995
The use of taxable goods for an exempt transaction disallowed a claim against VAT input tax. The use in that provision of the words ‘for transactions’ shows that to give the right to deduct under paragraph 2, the goods or services in question must . .
CitedEmsland-Starke GmbH v Hauptzollamt Hamburg-Jonas ECJ 14-Dec-2000
ECJ Articles 9(1), 10(1) and 20(2) to (6) of Regulation No 2730/79 laying down common detailed rules for the application of the system of export refunds on agricultural products, in the version resulting from . .
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 . .
CitedCadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue ECJ 2-May-2006
ECJ Opinion – Freedom of movement of persons – Freedom of establishment – Law on controlled foreign companies – Attribution to the parent company of the profits of its subsidiary established in another Member . .
ApprovedWHA Ltd and Another v Revenue and Customs CA 17-Jul-2007
The court considered the European principle of abuse of right.
Held: Lord Neuberger, delivering the leading judgment rejected the submission that the court was confined to considering the artificiality or purpose of each individual step, since . .
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 . .
CitedWeald Leasing (Taxation) ECJ 26-Oct-2010
ECJ Opinion – Value added tax (VAT) – Sixth Council Directive 77/388/EEC – Concept of ‘abusive practice’ and ‘normal commercial operations’ – Transaction designed solely to obtain a tax advantage – Leasing and . .
CitedCommissioners for Her Majesty’s Revenue and Customs v RBS Deutschland Holdings ECJ 22-Dec-2010
ECJ Sixth VAT Directive – Right to deduction – Purchase of vehicles and use for leasing transactions – Differences between the tax regimes of two Member States – Prohibition of abusive practices
‘taxable . .
CitedForvaltnings AB Stenholmen v Riksskatteverket ECJ 1-Apr-2004
ECJ Judgment – Sixth VAT Directive – Article 26a – Special arrangements applicable to second-hand goods – The term ‘second-hand goods’ – Horse sold on after training . .
CitedJyske Finans A/S v Skatteministeriet intervening parties: Nordania Finans A/S, BG Factoring A/S ECJ 8-Dec-2005
ECJ Sixth VAT Directive – Article 13B(c) – Exemptions – Exemption of supplies of goods excluded from the right to deduct – Resale of motor cars purchased second-hand by a leasing company – Article 26a – Special . .
CitedTest Claimants In The FII Group Litigation v Commissioners of Inland Revenue ECJ 12-Dec-2013
ECJ Judicial protection – Principle of effectiveness – Principles of legal certainty and the protection of legitimate expectations – Restitution of sums paid but not due – Remedies – National legislation – . .
CitedElida Gibbs Ltd v Commissioners Of Customs And Excise ECJ 24-Oct-1996
ECJ Where
(a) a manufacturer issues a money-off coupon, which is redeemable at the amount stated on the coupon by or at the expense of the manufacturer in favour of the retailer, (b) the coupon, which is . .
Lists of cited by and citing cases may be incomplete.


Updated: 27 November 2022; Ref: scu.547713