The Churchill car insurance group appears
to be pressing its case against HM Revenue & Customs (HMRC) in
an important VAT appeal affecting equipment leasing.
This is in spite of the fact that Churchill is
wholly owned by Royal Bank of Scotland (RBS), itself now mainly
government-owned through the banking bailouts.
The case concerns plant and equipment used by
Churchill in its accident repair centre. As an insurer,
Churchill's turnover consists mostly of VAT-exempt premium
income. It is not therefore generally able to recover VAT paid on
equipment and other purchases.
However, Churchill set up internal leasing
arrangements designed to defer net VAT costs over long periods.
Weald Leasing, a company controlled by Churchill,
acquired the equipment and leased it indirectly to Churchill over
10-year periods. No substantial finance cost was built into the
lease rentals. The VAT on the rentals was therefore not materially
higher than the VAT on the purchase cost of the equipment.
The leasing company itself could recover VAT, while
the insurer could not. The effect at group level of non-recovery of
VAT on the assets was therefore spread out over the lease periods
rather than taken up-front.
HMRC argues that the whole arrangement is
ineffective, being an “abuse of purpose” within the meaning of an
EU VAT Directive.
Weald Leasing has been successful in the appeal
stages to date, in the VAT Tribunal and again at the High Court.
HMRC took the case to the Court of Appeal, which referred the EU
law issues to the European Court of Justice (ECJ).
The ECJ has called for written observations from
the parties by 1 July, and will then decide on the timing of its
At the time when RBS was bailed out last October,
its previous management had plans to dispose of Churchill. However,
in February this year the present management decided to keep the
insurer within the banking group.
Through its UK Financial Investments arm, the
government currently owns some 74 per cent of the ordinary shares
of RBS, and over 80 per cent of its equity including non-voting