TC09595 - [2025] UKFTT 00894 (TC)

Having concluded that the security bond was consideration for the provision of training this issue falls away and, as such, it is not strictly necessary for us to address it. However, as it was argued before us, and in case of any further appeal, we have set out our conclusion on this issue, albeit not as comprehensively as would have been the case had we come to a different conclusion in relation to the consideration issue.

As the Court of Justice of the European Union (“CJEU”) observed in HMRC v RBS Deutschland Holdings GmbH (Case C-277/09) [2011] STC 345 at [53]:

“… taxable persons are generally free to choose the organisational structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purposes of limiting their tax burdens.”

However, this subject to an exception for “abusive transactions” as discussed in Halifax plc v Customs and Excise Comrs (Case C-255/02) [2006] STC 919 (“Halifax”). In Halifax the Court noted, at [73], that where there is a choice of one of two transactions a taxable person is not required to choose the one which “involves paying the highest amount of VAT but may choose to structure their business so as to limit their tax liability. The Court continued:

“74.

… 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.

75.

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 para 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 advantages.

…

80.

To allow taxable persons to deduct all input VAT 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. a

81.

As regards the second element, whereby the transactions concerned must essentially seek to obtain a tax advantage, it must be borne in mind that it is the responsibility of the national court to determine the real substance and significance of the transactions concerned. In so doing, it may take account of the purely artificial nature of those transactions and the links of a legal, economic and/or personal nature between the operators involved in the scheme for reduction of the tax burden (see, to that effect, Emsland Starke [2000] ECR 1-11569, para 58).”

Although it must be a principal aim, it is not necessary for the tax advantage to be the sole aim of the taxpayer concerned (see Ministero dell’Economia e delle Finanze v Part Service Srl [2008] STC 3132 at [45] – “Part Service”). Also, as is apparent from Part Service, at [59]-[60], the tax advantage does not have to be for the taxpayer but can equally be for its customer.

It is clear from HMRC v Pendragon Plc and others [2015] 1 WLR 2828 that the effect of the whole arrangement or scheme has to be considered. This is because the principle of abuse of law is, as Lord Sumption observed at [13]:

“… is, in this context, directed mainly to the method by which a commercial purpose is achieved, it is necessary to analyse each transaction by which it is achieved. Because the purpose of each step will generally be to contribute to the working of the whole scheme, …”

In Massey (trading as Hilden Park Partnership and another v HMRC [2016] STC 304 (“Massey”) the Upper Tribunal (Rose J, as she then was, and Judge Sinfield) at [60] held that it was for HMRC to establish a that a tax advantage is contrary to the VAT Directives and the essential aim of the transactions is to obtain a tax advantage.

Assuming therefore, for the purpose of this issue, that we had concluded that as a matter of economic and commercial reality the cadet does not pay for their training, it is necessary to consider whether a tax advantage is obtained contrary to the purpose of the statutory provisions; and if so whether that was the aim of the STP.

Ms Shaw contends that the STP, although structured in a tax efficient manner as it was clearly entitled to do, did not result in any tax advantage to APL. Neither, she says, was the obtaining of a tax advantage the essential function to the STP, the essential aim of the STP was an alternative to the traditional method of airlines funding the training of their new recruits (see paragraphs 11 – 13, above).

However, as is clear from Part Service, it is not necessary for any tax advantage to be restricted to APL and any such advantage to its customers, ie for the cadets or Sponsor Airlines, could be enough to regard the STP arrangements as abusive.

As such, we agree with Mr Watkinson that there was a tax advantage in this case and that this comprised two cumulative components. The first that the Sponsor Airlines were able to deduct the input tax on the placement fee even though they were immediately recompensed in the same sum by the proceeds of the bond being transferred to it in return for the placement fee. The second component is that the cadet who bears the economic consequences of training does not pay VAT on those sums.

We also agree with Mr Watkinson that the STP arrangement was designed from the outset to achieve such a tax advantage. This is clearly apparent from the VAT analysis, as discussed in the CTC VAT Report (see paragraph 60, above). That VAT was critical to the commercial viability of the arrangement is also apparent from the reference to the supply of cadets in a “tax efficient manner “ at sub-clause 4.3 of the Special Conditions in Schedule 1 to the BA Placement Contract (see paragraph 10 of the Appendix).

Finally, as confirmed in the Judicial Review Judgment, APL provided materially inaccurate and misleading information to HMRC (see paragraph 83, above) which, as Mr Watkinson contends, is a common feature of a tax avoidance scheme and also indicates that gaining a tax advantage was a principal aim of the STP.

Therefore, for these reasons, we find that, had we come to a different conclusion in regard to the consideration issue we would have concluded that the STP arrangement did give rise to a Halifax abusive result.