The Court of Appeal has issued its judgment in the case of Pendragon Plc (Pendragon), restoring the First-Tier Tribunal's decision. The principal issue in this case was whether or not the scheme of arrangement put in place by Pendragon was 'Halifax' abusive. Briefly, the scheme allowed VAT to be accounted for on the supply of ex-demonstrator cars under the second hand margin scheme rather than under the normal rules. Given the scale of the operation, the arrangement provided a significant tax advantage to Pendragon.
The First-tier Tribunal allowed Pendragon's appeal. Importantly, based on evidence gathered at the hearing, it found as a fact that the sole or main purpose of implementing the scheme was for the purposes of obtaining finance for the group's working capital and not for the purpose of obtaining a tax advantage. On appeal, the Upper Tribunal reversed the First-tier's decision concluding that, by making that finding, it had erred in law. Accordingly, the Upper Tribunal allowed HMRC's appeal holding that the sole aim of the scheme was to obtain a tax advantage.
By a unanimous verdict, the Court of Appeal has allowed Pendragon's appeal from the Upper Tribunal. The Court did not comment on whether the scheme was abusive or not but simply focused on the role of the Upper Tribunal as an appellate court. In simple terms, as the First-tier Tribunal had found, as a fact, that the scheme was introduced to obtain finance and not to obtain a tax advantage. As an appellate court, it was not open to the Upper Tribunal to interfere with that finding and it had, therefore, erred in law. Accordingly, under English law, the Court of Appeal was bound to restore the decision of the First-tier Tribunal.
Comment – Given the unanimous verdict in this judgment (3-0), it seems unlikely that leave to appeal to the Supreme Court will be granted although the possibility cannot be ruled out. The success of this case for the taxpayer rests solely on the fact that it managed to persuade the First-tier Tribunal (the fact finding court in these proceedings) that the sole or main aim of establishing the scheme of arrangement was not for the purpose of obtaining a tax advantage. Once that fact was established unless the finding was perverse, it was inevitable that the Upper Tribunal's judgment would be reversed. The case highlights the need to ensure that there are sound commercial reasons for implementing any type of scheme of arrangement which results or could result in the obtaining of a tax advantage.
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