A scheme designed to avoid VAT on car repairs that could have cost the Exchequer hundreds of millions of pounds a year has failed after a successful challenge by HMRC.
The Supreme Court ruled unanimously against the scheme, started in 1998, which involved the restructuring of a group selling car warranties so that VAT on repairs could be recovered.
The insurer’s responsibility to repair the cars was devolved to a claims handler via two Gibraltar reinsurers.
The scheme involved several members of a group of companies headed by Oriel Group, including claims handling company WHA, Gibraltar reinsurance companies Viscount Reinsurance Company and Crystal Reinsurance Company.
HMRC refused to repay tax to WHA and Viscount on the basis that the scheme failed, and the Supreme Court agreed. The court’s approach was that in cases involving a construct of contractual relationships, the matter must be assessed as a whole to determine the economic reality.
According to HMRC the ruling (WHA Limited and another v Her Majesty’s Revenue and Customs) protects £600m per year, which was potentially at risk from businesses using this type of scheme.
Exchequer secretary to the Treasury, David Gauke, said: “HMRC’s success in defeating this scheme sends a clear signal – the government will relentlessly pursue those that try to avoid their responsibilities, no matter how long it takes, and win.
“While most businesses and individuals pay the tax they owe on time, HMRC has received additional resources to make sure the minority are challenged when they attempt to avoid paying what is due.”