Car warranty tax scheme scuppered

A tax avoidance scheme designed to avoid VAT on car repairs that could have cost the Exchequer £600 million a year has failed after a successful challenge by HM Revenue and Customs (HMRC).

The scheme involved the restructuring of a group selling car warranties so that VAT on car repair services could be recovered. The insurer’s responsibility to repair the cars was devolved to a claims handler via two Gibraltar reinsurers.

The Supreme Court ruled unanimously against the scheme, which started in 1998. This ruling protects £600 million per year which was potentially at risk from businesses using this kind of avoidance scheme.

The 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.”

Notes for editors

1. The Supreme Court gave its judgment in WHA Limited and another v Her Majesty’s Revenue and Customs on 1 May 2013.

2. This scheme was designed to ensure that VAT could be recovered on car repair work done under warranty. Insurers cannot normally recover VAT on car repair work, because they do not have to charge VAT on the insurance premiums they receive.

3. The scheme involved several members of a group of companies headed by Oriel Group plc. WHA Ltd was a UK claims handling company. Viscount Reinsurance Company Ltd was a Gibraltar reinsurance company. Crystal Reinsurance Company Ltd was another Gibraltar reinsurance company. The Appellants in the case were WHA and Viscount. HMRC refused to repay tax to WHA and Viscount on the basis that the scheme failed. 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.

4. The Supreme Court’s press summary: http://www.supremecourt.gov.uk/decided-cases/docs/UKSC_2009_0074_PressSummary.pdf

5. The full decision: http://www.supremecourt.gov.uk/decided-cases/docs/UKSC_2009_0074_Judgment.pdf

6. Follow HMRC on Twitter @HMRCgovuk

7. HMRC’s flickr channel www.flickr.com/hmrcgovuk