Whilst the Government won the case in the European Court of Justice, it did not go as far as it could have done in setting up a general anti-avoidance rule.

The case involved the right to deny the bank a VAT repayment on the grounds that the structure it put in place to do so was abusive. The key point of general relevance is whether this gives the taxman more powers to tackle what he it perceives to be abusive tax arrangements.

“The Sixth VAT directive does not grant a taxable person the right to deduct input VAT where the transactions from which that right derives constitute an abusive practice,” the court's press release says.

However, the court ruled that the fact a company was trying to avoid tax did not constitute a sufficient reason for the government to rule out the arrangements. But that did not mean companies could abuse a right they were given. Tax authorities can attack VAT avoidance using an "abuse" doctrine but only if it would offend the underlying policy of the legislation to give the business the benefit. The Court emphasised that the abuse doctrine cannot apply in cases in which there is some wider business as well as tax avoidance objective.

Commentators have suggested that this decision heralds a new 'purposive' approach to interpreting legislation, rather than the current literal approach used by the UK courts. If this were to happen, the impact of the Halifax decision could extend much wider than VAT to encompass direct taxes.

So, is the principle that every man has a right to arrange his affairs to minimise his tax liability now under threat?

English law, and the UK courts, have always taken a literal approach to interpreting legislation of any sort. This is particularly the case with tax legislation, which can be extremely complex, and the literal spirit guides the judiciary in applying tax law to appeal cases. Those designing tax avoidance schemes need only to establish that their plans exploit the letter of the law to the benefit of the taxpayer. The purpose of the legislation is often irrelevant, unless the law is unclear.

The purposive approach to legislative interpretation has applied in Europe for some time, so it is no surprise that in this case a purposive approach has been taken. VAT, with its foot in both camps is always open to an approach which differs from the traditional UK literal interpretation.

The decision therefore raises two further interesting points.

• If the arrangements are permitted to stand if put in place to avoid tax, but not if they represent an abuse of rights, where is the line to be drawn between the two?
  
  
• How far will the abuse of rights principle be applied? Is it possible that this principle, together with the purposive approach to interpreting the legislation could be applied to direct taxes such as Corporation Tax and Capital Gains Tax? There is still probably some way to go until we get there but the Government are set to try to continue further down this road.

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