19514
DISCLOSURE – Documents – Allegation of abusive practice – Customs contend that tax avoidance is essential aim of transaction – Whether Tribunal should order disclosure of documents covering tax advice to Appellant – Whether necessary for fairly disposing of proceedings – Yes – Whether relevant – Yes – Application allowed – Value Added Tax Tribunal Rules r 20(3)

LONDON TRIBUNAL CENTRE

MMO2 PLC
	O2 COMMUNICATIONS	           Appellants

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	STEPHEN OLIVER QC (Chairman)

Sitting in public in London on 10 March 2006

Andrew Hitchmough, counsel, for the Appellants 

Christopher Vajda QC and Ben Lask, counsel, instructed by the Acting General Counsel and Solicitor for HMRC, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This decision concerns an application for disclosure under rule 20(3) of the Tribunals Rules.  The Customs seek the disclosure in the light of the decision of the European Court of Justice in Halifax Plc (Case C-255/02).  The disclosure sought is as follows:

“All external advice from tax and other advisors relating to the adoption and/or operation and/or implications of the Scheme. All internal advice and presentations to senior management, staff and contractors relating to the adopting and/or operation and/or implications of the Scheme. All external and internal research carried out in relation to the formation of  O2C, including but not limited to feasibility studies, location research, cost benefit analysis, investment appraisal, discounted cashflow analysis, impact analysis and presentation of various options.”

Background

2.	The Appellants, referred to as “O2”, appeal against decisions of the Customs in a letter dated 17 November 2004.  The decision concerned arrangements put into place by them from 11 November 2002 until 31 August 2003.  Prior to 11 November 2002 a company known as O2 (UK) Ltd (within the O2 VAT group) provided its telecommunications services via vouchers and e-top-ups, and accounted for VAT as appropriate. The new arrangements involved the creation of a company in Ireland, O2 Communications (“O2C” in the above notice), which O2 claims to have supplied the telecommunications services to redeemers of UK vouchers. O2 claimed that as a result of the arrangements and the interaction between the Irish and UK VAT regimes, no value added tax should be accounted for either in the United Kingdom or Ireland in respect of the telecommunications services provided to United Kingdom customers.  There will, I understand, be four issues for the Tribunal.  Three of these, that are not relevant to this application, are, first, whether there was any effective change in the contractual position between O2 and its customers purchasing telecommunications services using vouchers, compared to the proceeding period; second (assuming there was a contractual change) whether, as a matter of economic substance and reality, telecommunications services were supplied to customers under the arrangements by O2 or by O2C; and third, if such supplies were made by O2C, whether they were provided from a fixed establishment of O2C at the premises of O2 in the UK.

3.	The fourth issue is whether the arrangements amount to an abuse of law (or, to adopt the expression of the Court in Halifax, “an abusive practice”) implemented by O2 to bring part or all of the telecommunications supplies, which were within the charge to tax within the UK, outside the scope of VAT.

4.	The Customs originally applied for disclosure on 22 June 2005.  O2 refused a number of the Customs’ requests; one of the grounds for refusal was that, on the basis of the Advocate General’s Opinion in Halifax, documents relating to the “abuse” argument, which were evidence of O2’s subject of intentions, were irrelevant to the issue raised in the appeal.  In November 2005 O2 supplied a quantity of documents.  A pre-trial hearing took place before the Tribunal on 26 January 2006.  By then the decision of the Court in Halifax was imminent. The Tribunal directed that the Customs should provide reasons for their outstanding disclosure requests and that O2 should respond either providing the disclosure sought or providing reasons why not.  This hearing was fixed in advance to resolve outstanding issues.  

5.	Further documents were provided by O2 on 9 February and on 3 and 9 March.  It appears that there are other documents that O2 intend to disclose.  However, O2 and Customs are still in dispute as to the principle of whether disclosure of documents covering tax advice etc. is relevant to the abusive practice doctrine.  

The power to require disclosure

6.	Rule 20(3) reads as follows:

“In addition, and without prejudice to the foregoing provisions of this rule, a tribunal may, where it appears necessary for disposing fairly of the proceedings, on the application of a party to an appeal, direct that the other party to the appeal shall serve at the appropriate tribunal centre for the appeal within such period as it may specify a list of the documents or any class of documents which are or have been in his possession, custody or power relating to any question in issue in the appeal and may at the same time or subsequently order him to make and serve an affidavit verifying such list.”

Before making an order for disclosure, it appears from the wording of rule 20(3), the Tribunal must be satisfied that the documents sought by the Applicant are relevant to a question in issue in the appeal, that the documents appear necessary for disposing of the proceedings and that an order in the terms sought is in all the circumstances reasonable.  

The abuse principle

7.	It is clear that the Court in Halifax have now ruled that the abuse principle applies to VAT.  In paragraphs 74 and 75 the Court stated that:

“In view of the foregoing considerations, it would appear that, in the sphere of  VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.  

Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage.  As the Advocate General observed in point 89 of his Opinion, the prohibition of abuse is not relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantage.”

In paragraph 88 the Court went on to say:

“To allow taxable persons to deduct all input tax even though, in the context of their normal commercial operations, no transactions conforming with the deduction rules of the Sixth Directive or of the national legislation transposing it would have enabled them to deduct such VAT, or would have allowed them to deduct only a part, would be contrary to the principle of fiscal neutrality and, therefore, contrary to the purpose of those rules.”

In paragraph 86 of its judgment the Court concluded:

“For it to be found that an abusive practice exists, it is necessary: first, that the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of the Sixth Directive and of national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.  Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage.”

The case for Customs

8.	The Customs say that the documents sought by them in the terms of the disclosure notice set out in paragraph 1 above are relevant to a question in issue in the appeal. It is now necessary for the Tribunal to consider the “essential aim” test in the second limb of the Court’s explanation of the above principle. This involves a consideration of the objective purpose of the transaction; the Tribunal is required to determine whether, in the light of all the circumstances, the main purpose of the relevant transaction is to obtain a tax advantage. On this basis, say the Customs, the documents sought by them are relevant to the purpose of the scheme or arrangements and are an important feature for the Tribunal to take into account when considering the application of the abuse principle. Alternatively, they say, those documents will refer to the detailed objective circumstances in the context of which the decision to enter into those transactions was made.

O2’s response

9.	O2’s principal reason for opposing the disclosure application are also explained by reference to the Halifax judgment. O2’s first proposition is that a trader’s subjective intention (or purpose) is irrelevant to the questions whether the trader is carrying on an economic activity or making supplies of goods or services.  Those concepts “are all objective in nature and apply without regard to the purpose or results of the transactions concerned”: see paragraphs 48 to 60 of the Judgment.  The second proposition is that, in the light of the words of paragraph 86 of the Court’s judgment (set out above), a trader’s objective intention (or purpose) is equally irrelevant to the question whether the abuse principle should apply to the arrangements being considered. Accordingly, O2’s third proposition runs, the question for the Tribunal is whether, viewing the arrangements objectively, they were effective to create a contract between O2C and its various customers under which O2C made a supply of telecommunications services to those customers from its business establishment in Ireland.  The proper approach to this issue is to consider the various agreements in other documents by which effect is given to the arrangements at face value.  It is irrelevant what the parties or their advisers thought or intended was the effect of the arrangements, or the reason or reasons for having adopted them.

10.	O2 further point out that they have already supplied the Commissioners with a large quantity of documents. The production of further documents would put them to serious and burdensome work to no apparent value so far as the issues in the present appeal are concerned.  

11.	O2’s first proposition is not in dispute.  Their third proposition appears to me to concern the contractual issue, i.e. the first issue referred to in paragraph 4 above.  The third proposition, as I read it, has no bearing on the principle of abuse.  

Conclusion

12.	O2’s second proposition is directed at showing that the documents for which disclosure is sought evidenced O2’s subjective intention or purpose, and those features have no place in the abuse principle.  I do not accept this.  The Tribunal has to determine whether the essential aim of the transaction is to obtain a tax advantage.  That exercise is directed at the objective purpose of the transaction.  The Tribunal’s function in this respect is to examine the evidence and assess the purpose of the transaction.  If the purpose can be characterized, in the light of the evidence, as having the essential aim of securing a tax advantage, then the requirements of the second limb of the abuse test (see paragraph 75 of the Halifax decision) will be satisfied.

13.	On that basis it seems to me that the tax advice, if any, given to the management of O2 who decided to adopt the transaction will be relevant to the above issue. Thus the documents (if any) containing recommendations made to O2’s decision makers and those advising them will be relevant.

14.	Taking all those considerations into account I am satisfied that the Customs are entitled to disclosure of the tax advice documentation (if any) as set out in paragraph 1 of this Decision.  The obtaining of tax advice, the circumstances in which it was obtained and the nature of the advice are, in my view, objective factors.  They constitute evidence without which the Tribunal cannot properly determine whether the essential aim of the transactions concerned was to obtain a tax advantage.  I appreciate that O2 has already been put to considerable trouble in voluntarily disclosing a great deal of material.  But in all the circumstances I do not think that the request of the Customs is unreasonable.  

15.	Application allowed.  

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 16 March 2006

LON/04/2396
LON/04/2406
LON/04/119