Jonathan Peacock QC, considers one aspect of the 'abuse of rights' principle recently addressed by the VAT and Duties Tribunal in a number of landmark cases.
Published in the July issue of Tax Adviser. This article considers:
- the nature of general principles of EC law;
- the status of general principles;
- the traditional role for general principles;
- ‘reverse direct effect’ and ‘horizontal direct effect’;
- relevance in the tax context; and
- the ‘abuse of rights’ principle.
The continual struggle between taxpayers and tax-gatherers, characterised as ‘tax avoidance’ or ‘tax mitigation’ depending on one’s point of view, is traditionally marked by the ebbs and flows of the tide. Sometimes the tax tide recedes and taxpayers celebrate (say IR Commrs v Duke of Westminster
 AC 1); at other times there are high tides, widespread flooding and happy revenue raisers (say Furniss v Dawson
 BTC 71). Just occasionally the laws of physics are put aside and a new element is introduced; the most recent example is the reliance by Customs & Excise on the ‘abuse of rights’ principle in cases before the VAT Tribunal.
In such cases (Halifax plc & Ors v C & E Commrs  BTC 5,286, BUPA Hospitals Ltd and Goldsborough Developments Ltd No. 17,588, WHA and Viscount Reinsurance No. 17,605 and Blackqueen LtdNo.17,680) Customs have argued, with some success, that there is a general principle of European Commission (EC) law (the ‘abuse of rights’ principle) which operates, in the United Kingdom (UK) courts and tribunals, so as to prevent taxpayers taking advantage of what would otherwise be their legal rights in circumstances where those rights are being ‘abused’.
The general principles of EC law
The ‘general principles’ of EC law are the fundamental, unwritten, principles of law that underlie the entirety of EC law. They have a number of characteristics:
- they are derived, ultimately, from the rule of law;
- they are primarily concerned with public law matters governing the relationship between the individual and the authorities (whether it be EC institution or member state);
- they are drawn from the laws of the member states, but become (by some kind of osmosis at the European Court of Justice (ECJ)) a part of the EC legal order over and above any principles that may operate in any particular member state;
- They pre-exist the writing of the various treaties in the sense that specific articles that give effect to the general principles are understood by the ECJ to be expressions of ‘free-standing’ truths; and
- they give the ECJ the flexibility to develop EC law in a manner thought to be in the general interests of the European Union (EU) and, in particular, they allow the court to fill actual or perceived gaps in the written (treaty based) law.
The ECJ has recognised as general principles (inter alia) the principles of equal treatment (or non-discrimination), of proportionality, of legal certainty, of the protection of legitimate expectations and of the protection of fundamental (‘human’) rights.
The status of general principles in EC law
Article 220 of the EC Treaty provides that the ECJ shall ensure that ‘the law shall be observed’ in the interpretation and application of the Treaty. In discharging this function the ECJ has recognised general principles of law as being a part of ‘the law’ referred to in art. 220. General principles of EC law can thus be regarded as super constitutional rules that are binding on the institutions of the EC and on the member states. As such they play three distinct roles:
- As an aid to interpretation of written EC law – where there are competing interpretations of a Community provision the Courts are required to adopt the meaning which best gives effect to the treaties and to the general principles unless it is impossible to do so.
- The principles can be invoked in order to challenge the validity of a Community act, whether under art. 230 (formerly art 173) or art 234 (formerly art 177).
- The breach of a general principle can itself give rise to an action for damages if the tests laid down by the ECJ are satisfied.
In consequence of the above (and, specifically, the interpretative role), the courts of the UK are obliged to give effect to the general principles of EC law when construing EC law (e.g. a directive) and, by extension, any national implementing legislation (e.g. Value Added Tax Act 1994 (VATA 1994)). This is the theoretical basis behind the reliance in the UK courts on such principles as proportionality.
The traditional role for the general principles
General principles have traditionally been relied on by persons (both natural and legal) against member states – e.g. the contention that some domestic measure which implements a provision of EC law is disproportionate or offends the principle of certainty or that some act of a member state is unlawful by virtue of a want of effective judicial control. This is (to use the jargon) to give the principles ‘(vertical) direct effect’.
Reverse direct effect and horizontal direct effect
However it is (at least in legal theory) possible for such principles or rights to have other effects:
- for them to be relied on by a person against another person in a dispute not involving the member state it is known as ‘horizontal direct effect’:
- for the principles or rights to be relied on by a member state against a person it is known as ‘reverse direct effect’.
It is recognised by the ECJ (and is thus a part of UK law) that provisions of the Treaty may have horizontal direct effect but (to date) there is no authority that mere directives (literally, an instruction to a member state to achieve a particular aim) should have such horizontal effect. There has, as yet, been no specific question raised for answer by the ECJ challenging whether or not general principles can have such horizontal effect.
Relevance in the tax context
The potential relevance of such EC theorising in the tax context is considerable. If there are general principles which govern the actions of a member state (which a person can rely on when seeking to defend his rights) and which govern the actions of a person (which a member state can rely upon when seeking to defend its rights then (on one view) a level playing field is reached where both taxpayer and tax-gatherer have to act (say) proportionately and in a manner respectful to the need for (say) certainty and non-discrimination. While not all such general principles of EC law readily translate into obligations imposed upon a person that must be respected in his dealings with a member state the ‘tax avoidance’ battlefield looks a different place if the state’s weapons are substantially greater than has hitherto been believed to be the case.
At this point one can turn away from theory to see how the courts are grappling with such concepts in the particular field of the general principle of ‘abuse of rights’.
The ‘abuse of rights’ principle
The ‘abuse of rights’ principle is a simple concept. In appropriate circumstances, a court can, and should, prevent a person from ‘abusing’ rights by seeking to take advantage of them in circumstances in which they were not intended to be available to him. This is a principle that is both common to most member states of the EC and now found in the jurisprudence of the EC itself.
Abuse of rights: a domestic rule
At the domestic (national) level, the principle allows a national court to disregard transactions entered into by the parties and, instead, to apply the domestic tax legislation to the true nature of the transactions in issue. This is particularly important in the context of value added tax (VAT) where distortion of competition must be avoided.
Such a domestic rule allowing transactions that have been carried out in order to circumvent national law to be disregarded can be relied on by a national court even if it means not applying EC law to the transactions concerned. The ECJ will not allow persons to abuse EC law in order to circumvent national law.
Abuse of rights: an EC principle
The principle has now become a ‘general principle’ of EC law. It has been relied on by the ECJ in two main types of case:
- Where a person carries out transactions under cover of rights conferred by EC law with a view to circumventing national law the ECJ has approved the denial of the benefit of the relevant EC law rights to the person concerned. This is because the person is seeking to exercise the EC right:
‘unreasonably to derive, to the detriment of others, an improper advantage, manifestly contrary to the objective pursued by the legislator in conferring that particular right on the individual’.
(Centros Ltd v Erhvervs-og Selskabsstryrelsen (Case C 212/97  ECR I 1459).
- Where a person carries out transactions not for an economic purpose, but to obtain the benefit of provisions of EC law (e.g. those conferring a financial benefit) the ECJ has approved the denial of the benefit of the relevant EC law to that person. This is because the conditions for the grant of the benefit concerned have been created artificially: EMU Tabac  ECR I 1605 and, most recently, Emsland-Stärke v Hauptzollamt Hamburg Jonas, (Case C-110/99)  ECR I-11569.
Each of these cases demonstrates the overriding rationale of the principle: EC law is designed (in this field) to ensure the operation of the Single Market within the Community. However, transactions which have no true economic
purpose play no part in the operation of the single market and are therefore not entitled to the protection of the rules regulating that market.
This second aspect of the principle has also found expression in EC legislation: see Council Regulation 2988/95 on the protection of the EC’s own financial interests, art. 4(3). In Emsland-Stärke this provision was regarded as an example, in legislative form, of a general principle which otherwise existed.
The principle applies (see the submissions of the European Commission in Emsland-Stärke, adopted by the court) where there is evidence that:
– Despite formal observance of the conditions in EC law for the grant of a particular benefit, the purpose of the EC rules in issue has not been achieved.
– The person concerned intended to obtain the benefit of the EC rules by creating artificially the conditions laid down for the grant of the benefit.
Such evidence must be adduced before the national court – in accordance with the rules of national law and due respect must be paid to the principle of effectiveness of EC law. Where such evidence is present the court must deny the advantage that the ‘abuser’ seeks to obtain. In a VAT context the relevant abusive steps are ignored and the ‘true’ nature of the transaction is taxed.
As will be appreciated the contention that the ‘abuse of right’ general principle has such reverse direct effect is a hotly contested one. At present the position seems to be that this has been assumed to be the case by the ECJ since no such objection was made in Emsland-Stärke or in Diamantis v Elliniko Dimosio (Greek State) and Organismos Ikonomisi Anastgkroisis EpicheiriseonAE (OAE) (Case C-373/97)  ECR I-1705. In the latter case there is indeed an exact parallel with VAT cases in the UK in that the abuse of rights principle was relied on to prevent the exercise in a national court by a private individual of a right granted by a directive in litigation against a member state.
The application of the ‘abuse of rights’ principle was not considered by the Tribunal in Halifax. In BUPA and WHA the tribunal recognised that the principle existed and was capable of applying to VAT but held that it may only operate in cases where the taxpayer is relying on a right derived from EC legislation (say a directive) and not a right under UK law. This limitation on the operation of the right has now been questioned by the tribunal in Blackqueen where the tribunal seems to have been prepared to apply it even if the right relied on was derived from UK law only.
These issues, and other questions about the principle and its applications, are likely to be resolved by the ECJ in the Halifax case that has now been referred. Only then are we likely to know whether the tide is (currently) coming in or going out.
Jonathan Peacock QC, Lincoln’s Inn, London. The views expressed in this article are entirely his own. He may be contacted on tel.: 020 7242 4017; e-mail: email@example.com.
020 7235 9381