(1) The respondents were not entitled to claim credit for input tax on the vehicles

purchased as they could not be said to have been purchased with the intention of using them for the purposes of a business carried on by the respondents, as the vehicles were not being used for a transaction on which value added tax was to be charged. (The preferred analysis).

(2) In the alternative, the onward supplies made by the respondents should attract

value added tax in accordance with the reverse charge mechanism under section 8(1) and paragraph 9, Schedule 5 of the Value Added Tax Act 1994. As a consequence, the respondents would be entitled to claim credit for input tax incurred on the purchase of the vehicles, but the customer would be liable to account for output tax on the supplies made under the lease agreements. (The first alternative analysis).

(3) In the further alternative, the respondents and their customers had artificially

created conditions in order to obtain a tax advantage against the spirit and purpose of the value added tax legislation, amounting to an abuse of rights. Accordingly, the respondents should be denied input tax recovery on the purchase of the vehicles. (The second alternative analysis).

"The non-preferred contention for HM Revenue and Customs was that the appellants (the present respondents) were not entitled to claim the recovery of the input tax in question because there had been what they called an abuse of rights.

Assuming, but without deciding and without expressing any opinion on the soundness of the argument that the way in which transactions are structured as opposed to their genuineness or reality could ground a contention based upon a theory of abuse of rights the matter for the Tribunal at this stage was whether that part of the appeal be sisted pending the outcome of the proceedings before the ECJ in Halifax and Others.

By the stage this matter reached the Tribunal the Advocate General had delivered an opinion in that case on 7 April 2005. Again without affirming that his opinion would necessarily be followed it contains strong indications that a key question is whether there was an economic justification for the activity under scrutiny other than that of a tax advantage (para. 87). Further the Advocate General said, (para. 89) the prohibition of abuse as a principle of interpretation is no longer relevant where the economic activity carried out may have some explanation other than the mere attainment of tax advantages against tax authorities. Earlier in his opinion the Advocate General said, (para. 84) there is no legal obligation to run a business in such a way as to maximise tax revenue for the State. The basic principle was that of freedom to opt for the least taxed route to conduct business in order to minimise costs. In para. 56 the observation was made that there was in principle no single normal way to conduct an economic activity. There is nothing abnormal in itself, for example, in a banking company making use of interposed investment and development companies to carry on construction services instead of contracting directly with construction companies.

In the light of those observations, none of which are in the smallest way startling, the attempt in the present case to create an argument on abuse of rights in respect of transactions on their face for the purchase, lease and sale of goods which actually exist, facts conceded by the respondent (the present appellant) in paragraph 2 of the statement of case, might appear to have a slender foundation. On that basis alone there is little justification for sisting part of the appeal.

Matters however do not end there. This Tribunal would only sist proceedings against the wish of one of the parties pending a decision in another court where that decision would be determinative of the issues before the Tribunal. That does not appear clearly to be the case.

Moreover the question for the Tribunal on that aspect of the case appears to be whether HM Revenue and Customs have put forward a prima facie case that the transactions were in themselves artificial as opposed to being construed in a different and economically effective way. They have not. One suggestion made was that because a lease was for two years was unusual (so ran the argument) that could show an abuse of right. I found that proposition startling.

There is in the view of the Tribunal no reason why there should be any further delay for the appellant on this matter. If on the facts available and apparent in the correspondence already produced the transactions require to be accepted as genuine no question of abuse of rights could ever arise. If the transactions were not genuine HM Revenue and Customs would require to establish that, but there is no indication that they have even applied their minds to anything other than the legal issue which they set out in their 'preferred analysis'.

Indeed it is difficult to see in relation to the underlying facts of the entire appeal that there can be any substantial dispute on the facts as opposed to law. The case and the arguments upon it can be presented to the Tribunal without any consideration of Halifax. If HM Revenue and Customs' first contention is correct no question of abuse of rights arises."

The Tribunal, in its decision, then proceeded to deal in detail with the request for disclosure and production of documents. It is unnecessary in the present context to consider that part of the decision in detail.

Submissions for the appellants

C-419/02; and C-223/03). He pointed out that these three joined cases involved transactions entered into for the purpose of gaining a tax advantage in terms of a right to deduct input value added tax. In essence, the principal issues in those cases were as follows: (1) could transactions carried out with the sole purpose of enabling input tax to be recovered constitute an "economic activity" within the meaning of Article 4(2) of the Sixth Directive; (2) could the doctrine of "abuse of rights" be applied in the field of value added tax as a result of which claims to deduct value added tax incurred by a person in circumstances such as those of the present cases might be disallowed. The procedural position was that Halifax plc and Others challenged the Commissioners' refusals for repayment of value added tax on inputs before the Value Added Tax and Duties Tribunal, London, which dismissed the appeals. The Halifax applicants then appealed to the High Court of Justice in England and Wales (Chancery Division) which quashed the judgment and remitted it back to the Tribunal with a direction to determine, among other issues, whether the sole purpose of the associated applicants, in entering into the transactions at issue was value added tax avoidance. That question had been answered in the affirmative by that Tribunal, which, in addition referred certain questions to the European Court of Justice. Among the questions referred was the question:

"Does the doctrine of abuse of rights as developed by the Court operate to disallow the appellants their claims for recovery of or relief for input tax arising from the implementation of the relevant transactions?"

The High Court (Chancery Division) also decided to refer certain questions to the European Court of Justice. Among those questions were the following questions:

"(a) is there a principle of abuse of rights and/or abuse of the law which (independently of the interpretation given to the Directive) is capable of precluding the right to deduct input tax? (b) if so, in what circumstances would it apply? (c) would it apply in circumstances such as those found by the Tribunal?"

Submissions of the respondents

The decision

"Assuming, but without deciding and without expressing any opinion on the soundness of the argument that the way in which transactions are structured as opposed to their genuineness or reality could ground a contention based upon a theory of abuse of rights the matter for the Tribunal at this stage was whether that part of the appeal be sisted pending the outcome of the proceedings before the ECJ in Halifax and Others."

It appears to us that the adoption of that position was proper in the context of consideration of a motion for a partial sist of proceedings. However, unfortunately, the Tribunal did not adhere to that position. It drew attention to the fact that the Advocate General had delivered an opinion in that case on 7 April 2005. Having done that, the Tribunal then went on to adopt an approach to the case before it, based upon the Advocate General's opinion, even though it recognised that that opinion would not necessarily be followed by the European Court of Justice. Having proceeded in that way, at page 7 of the decision, the Tribunal expressed the view that the appellants' attempt to present a case based on abuse of rights seemed to it to have a slender foundation. That position is elaborated on page 8 of the decision where the Tribunal concludes that the appellants had not put forward a prima facie case of abuse of rights, presumably based upon the opinion of the Advocate General. Later on the same page the Tribunal expresses the opinion that, in the circumstances it considered existed, no question of abuse of rights could ever arise. In our opinion, what the Tribunal did, following the hearing on an application for a partial sist of the proceedings, was, in effect, to reach a firm conclusion about the abuse of rights element in the appellants' case, without holding a full hearing on that matter. The Tribunal, in our opinion, has simply prejudged that issue on an unsound basis. Furthermore, it did so in a context in which the Chancery Division of the High Court of Justice in London had considered it appropriate to make a referral to the European Court of Justice of certain questions which are virtually identical to the questions which arise in this case, that is to say, concerning the applicability of the doctrine of abuse of rights to value added tax legislation and where the referral process has not been completed by the European Court of Justice answering those questions, the answers to which, as counsel for the respondents conceded, must be relevant to the determination of the issue of abuse of rights in this case. In short, we consider that the Tribunal misdirected itself in law in relation to its decision not to allow a partial sist by proceeding upon a view of the law which cannot be regarded as affirmed. Until the European Court of Justice pronounces on this matter, we have difficulty in understanding how the Tribunal could have proceeded in that way.