A tax avoidance scheme designed to avoid VAT on car repairs has been successfully challenged by HMRC.

The scheme in question saw a group selling car warranties restructure themselves so that they could reclaim the VAT on car repair services. The group succeeded in this scheme by transferring the insurer’s responsibility to repair cars, to a claims handler at reinsurers in Gibraltar. This particular tax avoidance strategy would have potentially cost the tax office £600 million a year.

The scheme, which had been running since 1998, was unanimously ruled against in The Supreme Court after it was taken there by HMRC.

Explaining HMRC’s decision to challenge the car warranty tax 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.”

The ruling in this case was given by the Supreme Court on 1 May 2013. The overthrown scheme was designed by the tax avoiders 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.