In Shop Direct Group v HMRC [2016] UKSC 7 (17 February 2016), the Supreme Court found that a VAT repayment was liable to corporation tax in the hands of its recipient.
Shop Direct, a company of the Littlewoods group, had received a VAT repayment under VATA 1994 ss 78 and 80. The issue was whether the repayment (of nearly £125,000,000) was liable to corporation tax as a post-cessation receipt from a trade (ICTA 1988 ss 103 and 106, rewritten into CTA 2009).
The relevant supplies had first been made by Shop Direct and then, in turn, by three other group companies. The first question was therefore whether the charge to tax on post-cessation receipts fell only on the former trader, whose trade was the source of the income. The Supreme Court found that the basic rule in s 103 was that ‘sums arising from the carrying on of the trade’ before discontinuance were, if received after discontinuance, charged to tax under Case VI of Schedule D; and that there was no restriction in s 103 itself as to who the recipient may be.
The Supreme Court, having examined the various transfers of trade which had taken place within the group, found that the group had arranged for the VAT repayments to be made to Shop Direct, which received them as beneficial owner. Consequently, Shop Direct received ‘sums arising from the carrying on of the trade’ of the other group companies during periods ‘before the discontinuance’ and the sums were not otherwise chargeable to tax. The VAT repayment was therefore subject to corporation tax in the hands of its recipient Shop Direct Group.
Why it matters: The Supreme Court observed that s 106(1) imposed the charge on the former trader when the trader had transferred its rights to future receipts for value. However, s 106(1) did not apply here, as none of the transfers of trade had been for value, so that the charge could not fall on the various transferors. The rules therefore required a broad interpretation, without which receipts could remain untaxed.
Commenting on the decision, Lee Squires and Fiona Bantock observed: ‘Post-cessation receipts will be subject to corporation tax, regardless of whether or not the person receiving the sum is the original trader… This is an important point to remember for companies which have applied for overpaid VAT to be refunded by HMRC, particularly where they are part of a group that has undergone restructuring or where they involve companies that have permanently ceased trading’ (‘VAT briefing for March’, Tax Journal, 9 March 2016).
In UBS AG v HMRC and DB Group Services v HMRC [2016] UKSC 13 (9 March), the Supreme Court found that a share scheme designed to avoid income tax and NICs on the payment of bankers’ bonuses had failed.
The appeals related to avoidance schemes designed to avoid the payment of income tax on bankers’ bonuses by taking advantage of ITEPA 2003 Part 7 Ch 2 (as amended by FA 2003 Sch 22). Instead of paying the bonuses directly to the employees, the banks used the amounts of the bonuses to pay for redeemable shares in a special purpose offshore company. The shares were then awarded to the employees in place of the bonuses. Conditions were attached to the shares which were intended to bring them within the scope of the exemption from income tax (s 426). Once the exemption had accrued, the shares were redeemable by the employees for cash.
Employees could then cash in their shares immediately or two years later if they wanted to qualify for a 10% CGT rate.
The Supreme Court rejected the banks’ contention that it was impossible to attribute to Parliament an unexpressed intention to exclude these schemes from the ambit of the provisions. The court noted that the main purpose of the exemption was to promote employee share ownership by encouraging share incentive schemes and that Chapter 2 had been introduced partly for the purpose of forestalling tax avoidance schemes. More specifically, nothing could suggest that Parliament had intended that s 423 should also apply to transactions without any ‘connection to the real world of business’, where a restrictive condition had deliberately been added with no business or commercial purpose but solely in order to take advantage of the exemption.
The court found that the condition attaching to the shares issued by UBS – whether the FTSE 100 rose by a specified amount during a three week period - was completely arbitrary. It had no business or commercial rationale beyond tax avoidance and could therefore be disregarded with the effect that the shares were not restricted securities. Similarly, the condition attaching to the shares offered to DB employees contained a forfeiture provision which operated for a very short period and was within the control of the employees. It could therefore also be disregarded. Income tax was therefore payable on the value of the shares at the date of their acquisition.
Having found that the shares were not restricted securities, the Supreme Court was however not prepared to go further by finding, as suggested by HMRC, that the employees had not received shares but cash. It noted that the amount of cash for which the shares might be redeemed was neither fixed nor ascertainable when the shares were acquired, and was unlikely to be the same as the bonus which had initially been allocated to the employees.
Why it matters: Unlike the Court of Appeal, the Supreme Court considered that a purposive interpretation must prevail, despite what it referred to as ‘the inability of all counsel to explain the rationale of the tax exemption’. However, the Supreme Court only accepted what it called the ‘narrower Ramsay argument’; that the shares issued had not been restricted securities. It did not agree with the wider argument that the shares should be equated with cash. This case, and particularly the fact that the Court of Appeal and the Supreme Court reached opposite conclusions, is a reminder of the difficulty of identifying tax provisions which lend themselves to a purposive interpretation.
In HMRC v Apollo Fuels, B Edwards and others [2016] EWCA Civ 157 (17 March 2016), the Court of Appeal found that the lease of a car to an employee who paid lease charges at full market value was not a taxable benefit.
The issue was whether an employee was liable to income tax in respect of a car leased to him by his employer on arm’s length commercial terms, including lease charges at full market value. HMRC contended that, although the employee did not derive any financial benefit from the lease and paid a full price by way of lease charges, he was chargeable to income tax under ITEPA 2003 (Part 3 Chapter 6) so that the ‘cash equivalent’ of the leased car should be treated as part of the employee’s earnings. HMRC’s case had been rejected by both the FTT and the UT.
The Court of Appeal asked itself whether the fact that the employee paid the full market value for the car meant that there was no ‘benefit of the car’ within the meaning of s 120. The court pointed out that the ‘overall context’ of Chapter 6 was the charging of salary and other benefits derived from employment to income tax. Any provision deeming a supply for which the employee had paid full value to be chargeable as income would therefore need to be absolutely clear.
It also rejected HMRC’s argument that the rationale of Chapter 6 was to impose a tax on pollution.
The court could therefore see no reason not to give the word ‘benefit’ its ordinary meaning and concluded that the employee in this case had received no such benefit.
Why it matters: Like the FTT and the UT, the Court of Appeal roundly rejected HMRC’s argument that the term ‘benefit’ in Chapter 6 was simply a drafting formula equivalent to ‘the provision of a car’. The Budget published on 16 March however contained a clarification that the concept of ‘fair bargain’, which applies where an employee receives goods or services on the same terms as a member of the public, will no longer apply to cars, except where the employer provides hire cars to the public.
In Temple Finance and Temple Retail v HMRC [2016] UKFTT 41 (25 January 2016), the FTT found that a group structure which involved two companies in the same business was not artificial.
The two associated companies (TF and TR) carried out the ‘PerfectHome’ business. The business involved the sale of household goods furniture and electronic goods to consumers. It was aimed at credit constrained customers and most of the goods were sold under hire-purchase contracts, together with (optional) insurance and warranty.
TF provided finance and other services to customers, whilst TR sourced and supplied the goods. HMRC contended that the arrangements were artificial and that only one business was being carried out. The FTT was, however, satisfied that the ‘two company’ structure had not been set up with a view to securing VAT advantages, but had clear commercial advantages.
VATA 1994 Sch 6 applies only in relation to goods or services provided for a consideration that is less than their open market value. HMRC contended that TR, as a wholesaler, charged TF more than the open market value (97% of the retail price) for certain goods or services; and that this, in turn, suggested that TR ‘compensated’ for this element of overcharging by undercharging for other services.
The FTT found, however, that TR was not a wholesaler, given its expense of maintaining a large number of retail showrooms. Furthermore, while it sold large quantities of goods to TF in aggregate, it only sold a particular item to TF if TF was about to sell that item to an individual customer. It did not sell large quantities of goods in a single transaction.
Finally, the FTT found that TF’s business involved the making of taxable supplies of goods. Moreover, it could not make exempt supplies of finance without making those taxable supplies (since it did not provide finance other than for the purpose of enabling a customer to purchase goods). The taxable and exempt supplies were therefore inextricably linked with each other and the amount of its recoverable input tax on overheads should be determined by applying the standard (turnover-based) partial exemption method.
Why it matters: Although HMRC did contend that the structure was uncommercial, it fell short of relying on the Halifax principle of abuse. The FTT stressed that although the decision to structure the PerfectHome group in two companies had come at a cost, in terms of additional irrecoverable input tax, increased compliance costs and more complexity, this did not in itself make the structure uncommercial.
Commenting on the decision, Graham Elliott observed: ‘HMRC rightly invokes the concept of the tax being paid in accordance with the intentions of Parliament, but sometimes loses sight of this principle where the result seems inconvenient. However, it would perhaps be useful if HMRC appealed so that we had binding authority on the point’ (see ‘Temple Finance: open market value’, Tax Journal, 10 February 2016).
In Dr Walapu v HMRC [2016] EWHC 658 (23 March 2016), the High Court rejected a claim for judicial review of an advance payment notice (APN).
Dr Walapu had implemented a tax avoidance scheme marketed by the Mercury Tax Group and known as Liberty Syndicate 21. He sought judicial review of HMRC’s decision to issue an APN. He had claimed relief against past income tax assessments in his tax return but he had not yet had his claim formally assessed. He accordingly submitted that the APN required the payment on account of an unassessed tax liability that had not yet accrued. This case therefore differed from Rowe v HMRC [2015] EWHC 2293 in which HMRC had formerly assessed the liability.
The High Court first observed that the new arrangements (FA 2014 s 222 et seq) pursued a legitimate objective, were targeted precisely upon the class of persons who engaged in the activity sought to be suppressed, and incorporated a vigorous process whereby the APN was likely to correlate to the actual tax position. The court then proceeded to reject each of Dr Walapu’s arguments. It found that:
Why it matters: The court robustly rejected the notion that to require a citizen to pay to HMRC a sum which was not a sum assessed for tax constituted a profound violation of the citizen’s private rights. Consistently with its earlier decision in Rowe, it also rejected all arguments pertaining to the validity of the legislative scheme as well as arguments specific to Dr Walapu’s case.
In Shop Direct Group v HMRC [2016] UKSC 7 (17 February 2016), the Supreme Court found that a VAT repayment was liable to corporation tax in the hands of its recipient.
Shop Direct, a company of the Littlewoods group, had received a VAT repayment under VATA 1994 ss 78 and 80. The issue was whether the repayment (of nearly £125,000,000) was liable to corporation tax as a post-cessation receipt from a trade (ICTA 1988 ss 103 and 106, rewritten into CTA 2009).
The relevant supplies had first been made by Shop Direct and then, in turn, by three other group companies. The first question was therefore whether the charge to tax on post-cessation receipts fell only on the former trader, whose trade was the source of the income. The Supreme Court found that the basic rule in s 103 was that ‘sums arising from the carrying on of the trade’ before discontinuance were, if received after discontinuance, charged to tax under Case VI of Schedule D; and that there was no restriction in s 103 itself as to who the recipient may be.
The Supreme Court, having examined the various transfers of trade which had taken place within the group, found that the group had arranged for the VAT repayments to be made to Shop Direct, which received them as beneficial owner. Consequently, Shop Direct received ‘sums arising from the carrying on of the trade’ of the other group companies during periods ‘before the discontinuance’ and the sums were not otherwise chargeable to tax. The VAT repayment was therefore subject to corporation tax in the hands of its recipient Shop Direct Group.
Why it matters: The Supreme Court observed that s 106(1) imposed the charge on the former trader when the trader had transferred its rights to future receipts for value. However, s 106(1) did not apply here, as none of the transfers of trade had been for value, so that the charge could not fall on the various transferors. The rules therefore required a broad interpretation, without which receipts could remain untaxed.
Commenting on the decision, Lee Squires and Fiona Bantock observed: ‘Post-cessation receipts will be subject to corporation tax, regardless of whether or not the person receiving the sum is the original trader… This is an important point to remember for companies which have applied for overpaid VAT to be refunded by HMRC, particularly where they are part of a group that has undergone restructuring or where they involve companies that have permanently ceased trading’ (‘VAT briefing for March’, Tax Journal, 9 March 2016).
In UBS AG v HMRC and DB Group Services v HMRC [2016] UKSC 13 (9 March), the Supreme Court found that a share scheme designed to avoid income tax and NICs on the payment of bankers’ bonuses had failed.
The appeals related to avoidance schemes designed to avoid the payment of income tax on bankers’ bonuses by taking advantage of ITEPA 2003 Part 7 Ch 2 (as amended by FA 2003 Sch 22). Instead of paying the bonuses directly to the employees, the banks used the amounts of the bonuses to pay for redeemable shares in a special purpose offshore company. The shares were then awarded to the employees in place of the bonuses. Conditions were attached to the shares which were intended to bring them within the scope of the exemption from income tax (s 426). Once the exemption had accrued, the shares were redeemable by the employees for cash.
Employees could then cash in their shares immediately or two years later if they wanted to qualify for a 10% CGT rate.
The Supreme Court rejected the banks’ contention that it was impossible to attribute to Parliament an unexpressed intention to exclude these schemes from the ambit of the provisions. The court noted that the main purpose of the exemption was to promote employee share ownership by encouraging share incentive schemes and that Chapter 2 had been introduced partly for the purpose of forestalling tax avoidance schemes. More specifically, nothing could suggest that Parliament had intended that s 423 should also apply to transactions without any ‘connection to the real world of business’, where a restrictive condition had deliberately been added with no business or commercial purpose but solely in order to take advantage of the exemption.
The court found that the condition attaching to the shares issued by UBS – whether the FTSE 100 rose by a specified amount during a three week period - was completely arbitrary. It had no business or commercial rationale beyond tax avoidance and could therefore be disregarded with the effect that the shares were not restricted securities. Similarly, the condition attaching to the shares offered to DB employees contained a forfeiture provision which operated for a very short period and was within the control of the employees. It could therefore also be disregarded. Income tax was therefore payable on the value of the shares at the date of their acquisition.
Having found that the shares were not restricted securities, the Supreme Court was however not prepared to go further by finding, as suggested by HMRC, that the employees had not received shares but cash. It noted that the amount of cash for which the shares might be redeemed was neither fixed nor ascertainable when the shares were acquired, and was unlikely to be the same as the bonus which had initially been allocated to the employees.
Why it matters: Unlike the Court of Appeal, the Supreme Court considered that a purposive interpretation must prevail, despite what it referred to as ‘the inability of all counsel to explain the rationale of the tax exemption’. However, the Supreme Court only accepted what it called the ‘narrower Ramsay argument’; that the shares issued had not been restricted securities. It did not agree with the wider argument that the shares should be equated with cash. This case, and particularly the fact that the Court of Appeal and the Supreme Court reached opposite conclusions, is a reminder of the difficulty of identifying tax provisions which lend themselves to a purposive interpretation.
In HMRC v Apollo Fuels, B Edwards and others [2016] EWCA Civ 157 (17 March 2016), the Court of Appeal found that the lease of a car to an employee who paid lease charges at full market value was not a taxable benefit.
The issue was whether an employee was liable to income tax in respect of a car leased to him by his employer on arm’s length commercial terms, including lease charges at full market value. HMRC contended that, although the employee did not derive any financial benefit from the lease and paid a full price by way of lease charges, he was chargeable to income tax under ITEPA 2003 (Part 3 Chapter 6) so that the ‘cash equivalent’ of the leased car should be treated as part of the employee’s earnings. HMRC’s case had been rejected by both the FTT and the UT.
The Court of Appeal asked itself whether the fact that the employee paid the full market value for the car meant that there was no ‘benefit of the car’ within the meaning of s 120. The court pointed out that the ‘overall context’ of Chapter 6 was the charging of salary and other benefits derived from employment to income tax. Any provision deeming a supply for which the employee had paid full value to be chargeable as income would therefore need to be absolutely clear.
It also rejected HMRC’s argument that the rationale of Chapter 6 was to impose a tax on pollution.
The court could therefore see no reason not to give the word ‘benefit’ its ordinary meaning and concluded that the employee in this case had received no such benefit.
Why it matters: Like the FTT and the UT, the Court of Appeal roundly rejected HMRC’s argument that the term ‘benefit’ in Chapter 6 was simply a drafting formula equivalent to ‘the provision of a car’. The Budget published on 16 March however contained a clarification that the concept of ‘fair bargain’, which applies where an employee receives goods or services on the same terms as a member of the public, will no longer apply to cars, except where the employer provides hire cars to the public.
In Temple Finance and Temple Retail v HMRC [2016] UKFTT 41 (25 January 2016), the FTT found that a group structure which involved two companies in the same business was not artificial.
The two associated companies (TF and TR) carried out the ‘PerfectHome’ business. The business involved the sale of household goods furniture and electronic goods to consumers. It was aimed at credit constrained customers and most of the goods were sold under hire-purchase contracts, together with (optional) insurance and warranty.
TF provided finance and other services to customers, whilst TR sourced and supplied the goods. HMRC contended that the arrangements were artificial and that only one business was being carried out. The FTT was, however, satisfied that the ‘two company’ structure had not been set up with a view to securing VAT advantages, but had clear commercial advantages.
VATA 1994 Sch 6 applies only in relation to goods or services provided for a consideration that is less than their open market value. HMRC contended that TR, as a wholesaler, charged TF more than the open market value (97% of the retail price) for certain goods or services; and that this, in turn, suggested that TR ‘compensated’ for this element of overcharging by undercharging for other services.
The FTT found, however, that TR was not a wholesaler, given its expense of maintaining a large number of retail showrooms. Furthermore, while it sold large quantities of goods to TF in aggregate, it only sold a particular item to TF if TF was about to sell that item to an individual customer. It did not sell large quantities of goods in a single transaction.
Finally, the FTT found that TF’s business involved the making of taxable supplies of goods. Moreover, it could not make exempt supplies of finance without making those taxable supplies (since it did not provide finance other than for the purpose of enabling a customer to purchase goods). The taxable and exempt supplies were therefore inextricably linked with each other and the amount of its recoverable input tax on overheads should be determined by applying the standard (turnover-based) partial exemption method.
Why it matters: Although HMRC did contend that the structure was uncommercial, it fell short of relying on the Halifax principle of abuse. The FTT stressed that although the decision to structure the PerfectHome group in two companies had come at a cost, in terms of additional irrecoverable input tax, increased compliance costs and more complexity, this did not in itself make the structure uncommercial.
Commenting on the decision, Graham Elliott observed: ‘HMRC rightly invokes the concept of the tax being paid in accordance with the intentions of Parliament, but sometimes loses sight of this principle where the result seems inconvenient. However, it would perhaps be useful if HMRC appealed so that we had binding authority on the point’ (see ‘Temple Finance: open market value’, Tax Journal, 10 February 2016).
In Dr Walapu v HMRC [2016] EWHC 658 (23 March 2016), the High Court rejected a claim for judicial review of an advance payment notice (APN).
Dr Walapu had implemented a tax avoidance scheme marketed by the Mercury Tax Group and known as Liberty Syndicate 21. He sought judicial review of HMRC’s decision to issue an APN. He had claimed relief against past income tax assessments in his tax return but he had not yet had his claim formally assessed. He accordingly submitted that the APN required the payment on account of an unassessed tax liability that had not yet accrued. This case therefore differed from Rowe v HMRC [2015] EWHC 2293 in which HMRC had formerly assessed the liability.
The High Court first observed that the new arrangements (FA 2014 s 222 et seq) pursued a legitimate objective, were targeted precisely upon the class of persons who engaged in the activity sought to be suppressed, and incorporated a vigorous process whereby the APN was likely to correlate to the actual tax position. The court then proceeded to reject each of Dr Walapu’s arguments. It found that:
Why it matters: The court robustly rejected the notion that to require a citizen to pay to HMRC a sum which was not a sum assessed for tax constituted a profound violation of the citizen’s private rights. Consistently with its earlier decision in Rowe, it also rejected all arguments pertaining to the validity of the legislative scheme as well as arguments specific to Dr Walapu’s case.
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