In UBS AG v HMRC and DB Group Services v HMRC [2016] UKSC 13 (9 March 2016), 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.
Tax Journal’s coverage: ‘If one assumes that these decisions will not be appealed any further, HMRC is likely to be preparing itself for an all-out attack on various other institutions that have entered into similar arrangements in the past. For those attempting to offer remuneration to employees and directors in a tax friendly fashion, the risk-reward ratio has moved significantly against the taxpayer. If one cannot rely on the strict wording of legislation as a basis for determining whether tax is payable or not, uncertainty will undoubtedly reign’ (Philip Fisher, Tax Journal, 5 April 2016).
Why it’s our case of the year: This case is noteworthy on many levels. Firstly, it highlights the difficulty in applying a purposive interpretation to tax provisions since the two highest UK courts reached opposite conclusions. It is also a reminder that even a purposive interpretation has its limits; the Supreme Court would not go ‘all the way’ and equate shares with cash. It is finally a stark warning that many more employers are likely to come under HMRC’s fire.
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.
In Airtours Holidays Transport v HMRC [2016] UKSC 21 (11 May 2016), the Supreme Court found that Airtours was not entitled to recover input tax in relation to a report prepared by PwC and paid for by Airtours.
The issue was whether Airtours was entitled to recover input tax in respect of services provided by PwC and paid for by Airtours. This in turn depended on whether the services provided by PwC had been supplied to Airtours.
Airtours, which had borrowed money from around 80 banks, had been in serious financial difficulties and had sought refinancing. It had commissioned PwC to produce an accountants’ report to satisfy the banks that its restructuring proposals were viable.
The first issue was whether PwC had contractually agreed with Airtours that it would supply services to it, such as providing a report to the banks. The Supreme Court found that PwC’s obligation to provide its services was owed solely to the banks; and that Airtours was a party mainly for the purpose of agreeing to pay PwC’s fees.
The second issue was whether the facts that Airtours had a substantial commercial interest in the services being provided by PwC to the banks, and that it had agreed to pay PwC for the services, led to the conclusion that the services were ‘supplied’ to Airtours (as well as to the banks). The court found that the benefit which Airtours received was not the services from PwC, but the enhanced possibility of funding from the banks.
Why it matters: Two Lords dissented, observing that the approach taken by Lord Neuberger was too narrow. In their view, the real issue was whether, on the facts, the arrangements between the banks, PwC and Airtours involved the supply of services to Airtours or merely third party consideration provided by Airtours for services rendered to the banks alone. Airtours’ future had depended on the report, so that the value of the services provided by PwC was as great to Airtours as it was to the banks. They concluded that a tripartite agreement had been entered into and that PwC had owed a duty of care to Airtours.
‘It appears that whilst the Supreme Court may have answered the direct question in this case, it may, in doing so, have cast new doubt on the question of whether a taxpayer who is the recipient of a supply can deduct, as input tax, VAT paid by another person as “third-party consideration”’ (Nick Skerrett and Gary Barnett, Tax Journal, 19 May 2016).
In HMRC v National Exhibition Centre (Case C-130/15) and Bookit v HMRC (Case C-607/14) (26 May 2017), the CJEU found that a service consisting in the sale of tickets and the processing of payments did not fall within the exemption of the Sixth Directive art 13B(d)(3) (transactions in respect of payments and transfers).
The NEC owned and operated the National Exhibition Centre and other venues in Birmingham, which were used to stage trade and public exhibitions, sporting events and concerts. It hired its venues to third party promoters and sold tickets for those events. The NEC refunded the event promoter the part of the amount paid by the customer corresponding to the ticket price and kept the amount corresponding to the booking fee. The issue was whether the service provided by the NEC fell within the art 13B(d)(3) exemption, so that no VAT was due on the booking fee.
Bookit, a subsidiary of Odeon Cinemas, charged card handling fees to customers making advance bookings for cinema tickets. Until 2001, Odeon had provided these services itself. After consulting Deloitte & Touche, it had then restructured its ticket sales in order to ensure that the card handling fees were exempt from VAT. The issue was whether the card handling services were actually exempt.
The court noted that the card processing services provided by the NEC resulted in a payment or transfer within the exemption. However, it added that the mere fact that a service was essential for completing an exempt transaction did not warrant the conclusion that that service was exempt. As the NEC did not debit or credit the accounts concerned, it could not be regarded as executing the payment or transfer. The court concluded that the NEC merely collected information, communicated that information to the merchant acquirer bank and received information, which enabled it to make a sale and receive the corresponding funds. Similarly, Bookit played no specific and essential part in effecting the transfers of funds, so that the services it provided did not fall within the exemption.
Why it matters: ‘This (case) is illustrative of one of the main problems with the finance exemption: fragmentation of supplies and outsourcing of work can cause the finance exemption to be lost. Whilst VAT exemptions must be construed strictly, the interposition of layers of irrecoverable VAT in situations where, from a customer’s perception, the service rendered is one of payment processing seems contrary to the purpose of the exemption.’ (Nicolas Gardner and James Seddon, Tax Journal, 16 June 2016).
In Project Blue v HMRC [2016] EWCA Civ 485 (26 May 2016), the Court of Appeal found that FA 2003 s 71A did not apply to a land transaction, so that s 75A was not in point.
The issue was the SDLT payable on the purchase of the Chelsea Barracks from the Minister of Defence (MoD) by Project Blue (PBL), using an Ijara lease, which is a form of Sharia compliant financing (as opposed to an interest-bearing loan). The sale comprised the following steps:
Under FA 2003 s 45 (before its 2008 amendments), PBL was not liable to SDLT, as the completion of the contract between the MoD and PBL was ‘disregarded’ under ‘sub-sale relief’. Furthermore, under FA 2003 s 71A, no SDLT was payable on the transfer from the MoD to MAR under the second contract. This was because s 71A ensured that no SDLT was triggered by an Ijara lease transaction. Consequently, both the transfer to MAR and the leaseback by MAR were exempt alternative finance transactions. Finally, s 75A applied to a series of transactions between a vendor ‘V’ and a purchaser ‘P’, where the total SDLT payable was less than would have been payable on a direct sale by V to P.
The court observed that the purpose of s 71A was to limit SDLT to a single charge on the acquisition of the property from the third party vendor, whether by the financial institution or its customer. It would therefore be ‘strange’ for Parliament to have intended that both the acquisition of the property by the customer and its later acquisition by the financial institution should be SDLT free under sub-sale relief. The court therefore thought that the ‘much more obvious construction of s 71A’ was that cases falling within s 45(3) were intended to be treated as direct acquisitions by the financial institution from the third party vendor, which triggered SDLT so that MAR was liable.
As to s 75A, the court stressed that there was no reference in the provision to the purpose of the transaction being tax avoidance. Under s 75A, MAR was ‘P’ and must be treated as such. However, this was only relevant if the court was wrong in relation to s 71A.
Why it matters: The Court of Appeal reversed the UT’s decision, finding that s 75A did not apply because s 71A did not apply, so that the notional transaction and the actual transaction were identical for s 75A purposes. Interestingly, the s 71A argument was not run by PBL in the FTT and was given relatively short shrift by the UT.
‘The implications of this decision for other types of sub-sale planning done under s 45(3) are interesting. They give taxpayers who undertook such planning grounds for optimism, where their planning did not depend on the intermediate purchaser having a special status so as to confer a statutory exemption on the sub-purchaser’ (Patrick Cannon, Tax Journal, 9 June 2016).
In Acornwood LLP and others v HMRC [2016] UKUT 361 (4 August 2016), the UT upheld the FTT’s decision that the scheme implemented by the Icebreaker Partnerships failed.
All the appellants were members of partnerships, which had implemented arrangements giving rise to an accounting loss in each of the partnerships’ first accounting period. The loss was derived from the acquisition of intellectual property rights for a modest sum and the payment of a substantial exploitation fee to an exploitation company. The injection of capital by each member was mainly financed by borrowings, which were to be serviced by a guaranteed return on investment for the members. The appellants claimed that they were entitled to sideways loss relief against their income and capital gains tax liabilities (ICTA 1988 ss 380 and 381, TCGA 1992 s 261B and ITA 2007 ss 64, 71 and 72).
The main issue of the appeal was whether the expenditure claimed by the LLPs satisfied the requirement of ITTOIA 2005 s 34; that the losses arise from expenses incurred wholly and exclusively for the purposes of the trade. It was accepted that the LLPs were trading with a view to profit.
The UT accepted the FTT’s finding of fact that the borrowing had been an artificial inflation of the apparent size of the amount paid for the exploitation of the intellectual property rights. It increased neither the return to the individuals, nor the likelihood of the rights being exploited. It was therefore an arrangement with no commercial purpose but only a tax purpose. The UT explained the transactions as follows:
‘If therefore in a transaction which is designed to have beneficial tax consequences A agrees to pay B £5m ostensibly for some services, but in circumstances where A has borrowed £4m, where it is known to A that the £4m is not going to be used by B for providing those services, where B does not want the £4m for those services and regards the receipt of the £4m as a nuisance, and where B, to the knowledge of A, is immediately going to put the £4m in a blocked account the sole purpose of which is to repay A’s borrowing, it is not surprising if a tribunal regards it as far from self-evident that the £5m is really being paid for services.’
The UT therefore upheld the FTT’s finding that the fee paid by the LLPs had not been paid wholly and exclusively for the purpose of exploiting intellectual property rights.
Finally, however, like the FTT, the UT accepted that the amount paid by the LLPs after deduction of the borrowing was paid wholly and exclusively for the purposes of the LLPs’ trade.
Why it matters: The five appeals by the LLPs were directed to be lead cases; there were a further 46 Icebreaker Partnerships which were appellants in related cases. The total amount claimed by all 51 partnerships was about £336m. The UT adopted a purposive interpretation of the relevant provisions and the scheme failed.
In HMRC v Leekes [2016] UKUT 320 (12 July 2016), the UT found that s 343 only allowed loss relief in relation to the predecessor’s continued trade.
Leekes ran department stores. In November 2009, it had purchased the entire share capital of Coles, which ran furniture stores and warehousing facilities. Coles had losses in that tax year, as well as carried forward losses. Coles’ business had then been hived up to Leekes and Coles had become dormant. Leekes had refurbished the stores previously owned by Coles and rebranded them as Leekes stores.
In its corporation tax return for the year ended 31 March 2010, Leekes had offset Coles’ losses against its own trading profits, on the basis that it had succeeded to Coles’ trade (ICTA 1988 s 343). HMRC accepted that there had been a succession; however, it considered that set off was only available against any income generated by what was formerly Coles’ business. If HMRC were correct, no relief was available in the relevant year because that part of the enlarged business taken over by Leekes from Coles remained unprofitable.
The UT observed that Coles, the predecessor for s 343 purposes, could not have carried on the enlarged trade but only its own smaller trade and it is only by reference to the profits, if any, of that trade that it would have been entitled to relief for accumulated losses. The UT concluded that s 343 therefore only allowed relief in relation to that trade; the ‘trade’ to which sub-s (3) referred was the same trade as the ‘trade’ referred to in sub-s (1). Any other interpretation would have created scope for abuse and profit streaming was not required in such circumstances.
Why it matters: The UT noted that s 343 represented ‘an exception to the finality of s 337, without which the potential relief in respect of accumulated losses would be forfeited on cessation of the trade by the predecessor’. Therefore, the purpose of s 343 was ‘not to put the successor in a better position than that in which the predecessor would have found itself had it carried on the trade, but to transfer the potential for relief, without change, to the successor in a case falling within sub-s (1)’.
In R (on the application of Vital Nut Co. Ltd and another) v HMRC [2016] EWHC 1797 (19 July 2016), the High Court dismissed a claim for judicial review of advance payment notices (APNs), which relied on an argument that the claimants had not known HMRC’s position.
The High Court accepted that the notice requirement for the issue of a valid APN could not be satisfied unless the designated officer had determined that the claimed tax advantage was disputed. The claimants argued that no such determination had been made. The underlying issue was whether employer contributions have to give rise to an employment income charge to satisfy the definition of ‘qualifying benefits’. This could lead to an argument that an employment income tax charge had arisen that was now barred by limitation, and that statute barred charge meant that the claim for relief from corporation tax was valid.
The High Court found that the assessments for PAYE and NICs were protective. They did not show that a primary argument, that the claim for relief from corporation tax was not valid, had been abandoned; or that a claim for that relief was accepted as valid; or that no view had been taken on the efficacy of the claim for relief from corporation tax. The High Court also rejected the assertions that HMRC had not formed a view on the efficacy of the claim for relief, and that the applicants were unaware of HMRC’s view. HMRC had publicised its view that the interpretation of the relevant provisions, relied on by the taxpayers to claim relief from corporation tax for employer contributions, was not correct.
Why it matters: This is yet another claim for judicial review of APNs which has been dismissed by the High Court. The ground for review was, however, different from the previous challenges, as the claimants contended that they had not been aware of HMRC’s position. This was robustly rejected on the facts by the High Court.
‘With the previous grounds of challenge in Rowe et al lying at the bottom of the ocean, this time the taxpayer argued that the taxpayer had not known what HMRC’s position actually was, because the designated HMRC officer had not actually made a determination, which was a necessary requirement for the issue of an APN. Charles J, however, held that HMRC had not abandoned its primary argument that the claim for corporation tax relief was not valid; and that the taxpayers were, in fact, aware of HMRC’s view, which had been published. Looking at the position in the round, the APN did specify an amount which had been determined to the best of the designated officer’s information and belief. This amount was equal to the asserted amount, which was not a relief from corporation tax resulting from the EFRBS arrangements undertaken by the taxpayer; and so the necessary condition for the issue of the APNs had been made out’ (Patrick Cannon, Tax Journal, 9 September 2016).
In R (on the application of Ingenious Media Holdings and another) v HMRC [2016] UKSC 54 (19 October 2016), the Supreme Court found that HMRC had breached its duty of confidentiality when discussing film partnerships with the press and that such a breach could not be justified.
Mr McKenna, a former senior partner of a global firm of chartered accountants, had devised film investment schemes involving film production partnerships. On 14 June 2012, the permanent secretary for tax in HMRC, David Hartnett, had given an interview about tax avoidance to two financial journalists from The Times. On 21 June 2012, The Times had published two articles, one of which read: ‘Mr McKenna … and [X] are the two main providers of film investments schemes in the UK … Mr McKenna, 56, founder of Ingenious Media, is also involved in a long-running Revenue inquiry into three of his partnerships.’
The reasons given by Mr Hartnett for the disclosures were that it was generally in HMRC’s interests to try to establish good relations with the financial press; that they provided a way of emphasising to the general public HMRC’s views on elaborate tax avoidance schemes; and that Mr Hartnett thought that the journalists might have information of significant value to HMRC, which they might reveal as the dialogue continued. Mr Hartnett also emphasised that the interview had been agreed to be off the record.
Under the Commissioners for Revenue and Customs Act 2005 s 18(1), HMRC may not disclose information it holds in connection with its function.
Ingenious Media had brought a claim for judicial review of the disclosures.
Both the High Court and the Court of Appeal had found that the disclosures had not been in connection with a function of HMRC; and that they had been made for the purpose of a function of HMRC, so that s 18(1) did not apply by virtue of s 18(2)(a)(i). The Supreme Court considered, however, that in passing the 2005 Act, Parliament could not be supposed to have envisaged that by s 18(2)(a)(i) ‘it was authorising HMRC officials to discuss its views of individual taxpayers in off the record discussions, whenever officials thought that this would be expedient for some collateral purpose connected with its functions, such as developing HMRC’s relations with the press’.
The Supreme Court added that the fact that the interview had been agreed to be ‘off the record’ did not change the position. ‘An impermissible disclosure of confidential information was no less impermissible just because the information was passed on in confidence; every schoolchild knew that.’
Why it matters: Reversing the decisions of the lower courts, the Supreme Court found that HMRC’s breach of its duty of confidentiality could not be justified by its stated goal of fostering good relationships with the financial press. The Commissioners for Revenue and Customs Act 2005 s 18(2)(a)(i) could not be read as giving HMRC a discretion so wide that it would ‘emasculate’ its duty of confidentiality.
‘The judgment emphasises that HMRC’s duty of confidentiality is a fundamental duty owed to the taxpayer and aligned with the common law duty. In practice, it is likely that HMRC will now be increasingly wary of making disclosures, unless they fall squarely within a specific exclusion or are overwhelmingly justified … The fact that the court refocused the discussion onto a question of common law breach of confidentiality means that the strength of the judicial review application was not addressed. Arguably, it was even implicit in Lord Toulson’s judgment that HMRC might actually have succeeded were this a matter of public law. If a court will not intervene into actions taken by HMRC that represent a clear breach of confidentiality and a matter of “serious concern”, then what purpose does judicial review serve?’ (Gideon Sanitt, Tax Journal, 28 October 2016).
In HMRC v MG Rover Group Ltd; Standard Chartered plc v HMRC [2016] UKUT 434 (19 October 2016), the UT found that VATA 1994 s 43 required, as permitted by the Principal VAT Directive art 4(4), repayment rights under VATA 1994 s 80 to be held only by the representative member both before and after the relevant trader had left the group, or the group had been dissolved.
The decisions of the FTT, in Standard Chartered Plc v HMRC; Lloyds Banking Group Plc v HMRC [2014] UKFTT 316 and MG Rover Group Ltd v HMRC, BMW (UK) Holdings and Rover Company Ltd v HMRC [2014] UKFTT 327, turned on the interaction between the grouping provisions in VATA 1994 s 43, when a company moved into or out of a VAT group, and the entitlement to repayment under VATA 1994 s 80.
It had been directed that all the appeals be heard together. The UT found that the scheme created by s 43 complied with art 4(4). The transactions undertaken by each member were treated as if undertaken by one person, so that each individual member was no longer a taxable person and intra group transactions were disregarded. This satisfied the requirement that members were treated as if they were a single person. Consequently, VATA 1994 provided only the representative member with the associated rights to make a claim under s 80. This meant that transactions which had taken place while a VAT group had existed, did not cease to be subject to that regime when a member left the group or a group was disbanded.
Why it matters: Two FTTs had reached differing views on this question, deciding in the case of Lloyds and Standard Chartered that the claim remained with the VAT group, but in MG Rover and BMW that the claim belonged to the former member. The UT observed that VATA 1994 s 43 provided a two stage process. At the first stage, the VAT rights and obligations of a notional single person were determined. At the second stage, those rights and obligations were attributed to the member who had been treated as that single person; the representative member of the group.
‘Businesses and advisers will therefore need to pay close attention to who is entitled to submit any bad debt relief claim, once the RWS (real world supplier) is separate from the VAT group it was in at the time the sales were made. Indeed, the UT judges suggest that arrangements could be made to ensure that the RWS receives the benefit of any bad debt relief or VAT repayment claim when it leaves the group (assuming all parties are agreeable to that)’ (Sian Beusch, Tax Journal, 17 November 2016).
In UBS AG v HMRC and DB Group Services v HMRC [2016] UKSC 13 (9 March 2016), 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.
Tax Journal’s coverage: ‘If one assumes that these decisions will not be appealed any further, HMRC is likely to be preparing itself for an all-out attack on various other institutions that have entered into similar arrangements in the past. For those attempting to offer remuneration to employees and directors in a tax friendly fashion, the risk-reward ratio has moved significantly against the taxpayer. If one cannot rely on the strict wording of legislation as a basis for determining whether tax is payable or not, uncertainty will undoubtedly reign’ (Philip Fisher, Tax Journal, 5 April 2016).
Why it’s our case of the year: This case is noteworthy on many levels. Firstly, it highlights the difficulty in applying a purposive interpretation to tax provisions since the two highest UK courts reached opposite conclusions. It is also a reminder that even a purposive interpretation has its limits; the Supreme Court would not go ‘all the way’ and equate shares with cash. It is finally a stark warning that many more employers are likely to come under HMRC’s fire.
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.
In Airtours Holidays Transport v HMRC [2016] UKSC 21 (11 May 2016), the Supreme Court found that Airtours was not entitled to recover input tax in relation to a report prepared by PwC and paid for by Airtours.
The issue was whether Airtours was entitled to recover input tax in respect of services provided by PwC and paid for by Airtours. This in turn depended on whether the services provided by PwC had been supplied to Airtours.
Airtours, which had borrowed money from around 80 banks, had been in serious financial difficulties and had sought refinancing. It had commissioned PwC to produce an accountants’ report to satisfy the banks that its restructuring proposals were viable.
The first issue was whether PwC had contractually agreed with Airtours that it would supply services to it, such as providing a report to the banks. The Supreme Court found that PwC’s obligation to provide its services was owed solely to the banks; and that Airtours was a party mainly for the purpose of agreeing to pay PwC’s fees.
The second issue was whether the facts that Airtours had a substantial commercial interest in the services being provided by PwC to the banks, and that it had agreed to pay PwC for the services, led to the conclusion that the services were ‘supplied’ to Airtours (as well as to the banks). The court found that the benefit which Airtours received was not the services from PwC, but the enhanced possibility of funding from the banks.
Why it matters: Two Lords dissented, observing that the approach taken by Lord Neuberger was too narrow. In their view, the real issue was whether, on the facts, the arrangements between the banks, PwC and Airtours involved the supply of services to Airtours or merely third party consideration provided by Airtours for services rendered to the banks alone. Airtours’ future had depended on the report, so that the value of the services provided by PwC was as great to Airtours as it was to the banks. They concluded that a tripartite agreement had been entered into and that PwC had owed a duty of care to Airtours.
‘It appears that whilst the Supreme Court may have answered the direct question in this case, it may, in doing so, have cast new doubt on the question of whether a taxpayer who is the recipient of a supply can deduct, as input tax, VAT paid by another person as “third-party consideration”’ (Nick Skerrett and Gary Barnett, Tax Journal, 19 May 2016).
In HMRC v National Exhibition Centre (Case C-130/15) and Bookit v HMRC (Case C-607/14) (26 May 2017), the CJEU found that a service consisting in the sale of tickets and the processing of payments did not fall within the exemption of the Sixth Directive art 13B(d)(3) (transactions in respect of payments and transfers).
The NEC owned and operated the National Exhibition Centre and other venues in Birmingham, which were used to stage trade and public exhibitions, sporting events and concerts. It hired its venues to third party promoters and sold tickets for those events. The NEC refunded the event promoter the part of the amount paid by the customer corresponding to the ticket price and kept the amount corresponding to the booking fee. The issue was whether the service provided by the NEC fell within the art 13B(d)(3) exemption, so that no VAT was due on the booking fee.
Bookit, a subsidiary of Odeon Cinemas, charged card handling fees to customers making advance bookings for cinema tickets. Until 2001, Odeon had provided these services itself. After consulting Deloitte & Touche, it had then restructured its ticket sales in order to ensure that the card handling fees were exempt from VAT. The issue was whether the card handling services were actually exempt.
The court noted that the card processing services provided by the NEC resulted in a payment or transfer within the exemption. However, it added that the mere fact that a service was essential for completing an exempt transaction did not warrant the conclusion that that service was exempt. As the NEC did not debit or credit the accounts concerned, it could not be regarded as executing the payment or transfer. The court concluded that the NEC merely collected information, communicated that information to the merchant acquirer bank and received information, which enabled it to make a sale and receive the corresponding funds. Similarly, Bookit played no specific and essential part in effecting the transfers of funds, so that the services it provided did not fall within the exemption.
Why it matters: ‘This (case) is illustrative of one of the main problems with the finance exemption: fragmentation of supplies and outsourcing of work can cause the finance exemption to be lost. Whilst VAT exemptions must be construed strictly, the interposition of layers of irrecoverable VAT in situations where, from a customer’s perception, the service rendered is one of payment processing seems contrary to the purpose of the exemption.’ (Nicolas Gardner and James Seddon, Tax Journal, 16 June 2016).
In Project Blue v HMRC [2016] EWCA Civ 485 (26 May 2016), the Court of Appeal found that FA 2003 s 71A did not apply to a land transaction, so that s 75A was not in point.
The issue was the SDLT payable on the purchase of the Chelsea Barracks from the Minister of Defence (MoD) by Project Blue (PBL), using an Ijara lease, which is a form of Sharia compliant financing (as opposed to an interest-bearing loan). The sale comprised the following steps:
Under FA 2003 s 45 (before its 2008 amendments), PBL was not liable to SDLT, as the completion of the contract between the MoD and PBL was ‘disregarded’ under ‘sub-sale relief’. Furthermore, under FA 2003 s 71A, no SDLT was payable on the transfer from the MoD to MAR under the second contract. This was because s 71A ensured that no SDLT was triggered by an Ijara lease transaction. Consequently, both the transfer to MAR and the leaseback by MAR were exempt alternative finance transactions. Finally, s 75A applied to a series of transactions between a vendor ‘V’ and a purchaser ‘P’, where the total SDLT payable was less than would have been payable on a direct sale by V to P.
The court observed that the purpose of s 71A was to limit SDLT to a single charge on the acquisition of the property from the third party vendor, whether by the financial institution or its customer. It would therefore be ‘strange’ for Parliament to have intended that both the acquisition of the property by the customer and its later acquisition by the financial institution should be SDLT free under sub-sale relief. The court therefore thought that the ‘much more obvious construction of s 71A’ was that cases falling within s 45(3) were intended to be treated as direct acquisitions by the financial institution from the third party vendor, which triggered SDLT so that MAR was liable.
As to s 75A, the court stressed that there was no reference in the provision to the purpose of the transaction being tax avoidance. Under s 75A, MAR was ‘P’ and must be treated as such. However, this was only relevant if the court was wrong in relation to s 71A.
Why it matters: The Court of Appeal reversed the UT’s decision, finding that s 75A did not apply because s 71A did not apply, so that the notional transaction and the actual transaction were identical for s 75A purposes. Interestingly, the s 71A argument was not run by PBL in the FTT and was given relatively short shrift by the UT.
‘The implications of this decision for other types of sub-sale planning done under s 45(3) are interesting. They give taxpayers who undertook such planning grounds for optimism, where their planning did not depend on the intermediate purchaser having a special status so as to confer a statutory exemption on the sub-purchaser’ (Patrick Cannon, Tax Journal, 9 June 2016).
In Acornwood LLP and others v HMRC [2016] UKUT 361 (4 August 2016), the UT upheld the FTT’s decision that the scheme implemented by the Icebreaker Partnerships failed.
All the appellants were members of partnerships, which had implemented arrangements giving rise to an accounting loss in each of the partnerships’ first accounting period. The loss was derived from the acquisition of intellectual property rights for a modest sum and the payment of a substantial exploitation fee to an exploitation company. The injection of capital by each member was mainly financed by borrowings, which were to be serviced by a guaranteed return on investment for the members. The appellants claimed that they were entitled to sideways loss relief against their income and capital gains tax liabilities (ICTA 1988 ss 380 and 381, TCGA 1992 s 261B and ITA 2007 ss 64, 71 and 72).
The main issue of the appeal was whether the expenditure claimed by the LLPs satisfied the requirement of ITTOIA 2005 s 34; that the losses arise from expenses incurred wholly and exclusively for the purposes of the trade. It was accepted that the LLPs were trading with a view to profit.
The UT accepted the FTT’s finding of fact that the borrowing had been an artificial inflation of the apparent size of the amount paid for the exploitation of the intellectual property rights. It increased neither the return to the individuals, nor the likelihood of the rights being exploited. It was therefore an arrangement with no commercial purpose but only a tax purpose. The UT explained the transactions as follows:
‘If therefore in a transaction which is designed to have beneficial tax consequences A agrees to pay B £5m ostensibly for some services, but in circumstances where A has borrowed £4m, where it is known to A that the £4m is not going to be used by B for providing those services, where B does not want the £4m for those services and regards the receipt of the £4m as a nuisance, and where B, to the knowledge of A, is immediately going to put the £4m in a blocked account the sole purpose of which is to repay A’s borrowing, it is not surprising if a tribunal regards it as far from self-evident that the £5m is really being paid for services.’
The UT therefore upheld the FTT’s finding that the fee paid by the LLPs had not been paid wholly and exclusively for the purpose of exploiting intellectual property rights.
Finally, however, like the FTT, the UT accepted that the amount paid by the LLPs after deduction of the borrowing was paid wholly and exclusively for the purposes of the LLPs’ trade.
Why it matters: The five appeals by the LLPs were directed to be lead cases; there were a further 46 Icebreaker Partnerships which were appellants in related cases. The total amount claimed by all 51 partnerships was about £336m. The UT adopted a purposive interpretation of the relevant provisions and the scheme failed.
In HMRC v Leekes [2016] UKUT 320 (12 July 2016), the UT found that s 343 only allowed loss relief in relation to the predecessor’s continued trade.
Leekes ran department stores. In November 2009, it had purchased the entire share capital of Coles, which ran furniture stores and warehousing facilities. Coles had losses in that tax year, as well as carried forward losses. Coles’ business had then been hived up to Leekes and Coles had become dormant. Leekes had refurbished the stores previously owned by Coles and rebranded them as Leekes stores.
In its corporation tax return for the year ended 31 March 2010, Leekes had offset Coles’ losses against its own trading profits, on the basis that it had succeeded to Coles’ trade (ICTA 1988 s 343). HMRC accepted that there had been a succession; however, it considered that set off was only available against any income generated by what was formerly Coles’ business. If HMRC were correct, no relief was available in the relevant year because that part of the enlarged business taken over by Leekes from Coles remained unprofitable.
The UT observed that Coles, the predecessor for s 343 purposes, could not have carried on the enlarged trade but only its own smaller trade and it is only by reference to the profits, if any, of that trade that it would have been entitled to relief for accumulated losses. The UT concluded that s 343 therefore only allowed relief in relation to that trade; the ‘trade’ to which sub-s (3) referred was the same trade as the ‘trade’ referred to in sub-s (1). Any other interpretation would have created scope for abuse and profit streaming was not required in such circumstances.
Why it matters: The UT noted that s 343 represented ‘an exception to the finality of s 337, without which the potential relief in respect of accumulated losses would be forfeited on cessation of the trade by the predecessor’. Therefore, the purpose of s 343 was ‘not to put the successor in a better position than that in which the predecessor would have found itself had it carried on the trade, but to transfer the potential for relief, without change, to the successor in a case falling within sub-s (1)’.
In R (on the application of Vital Nut Co. Ltd and another) v HMRC [2016] EWHC 1797 (19 July 2016), the High Court dismissed a claim for judicial review of advance payment notices (APNs), which relied on an argument that the claimants had not known HMRC’s position.
The High Court accepted that the notice requirement for the issue of a valid APN could not be satisfied unless the designated officer had determined that the claimed tax advantage was disputed. The claimants argued that no such determination had been made. The underlying issue was whether employer contributions have to give rise to an employment income charge to satisfy the definition of ‘qualifying benefits’. This could lead to an argument that an employment income tax charge had arisen that was now barred by limitation, and that statute barred charge meant that the claim for relief from corporation tax was valid.
The High Court found that the assessments for PAYE and NICs were protective. They did not show that a primary argument, that the claim for relief from corporation tax was not valid, had been abandoned; or that a claim for that relief was accepted as valid; or that no view had been taken on the efficacy of the claim for relief from corporation tax. The High Court also rejected the assertions that HMRC had not formed a view on the efficacy of the claim for relief, and that the applicants were unaware of HMRC’s view. HMRC had publicised its view that the interpretation of the relevant provisions, relied on by the taxpayers to claim relief from corporation tax for employer contributions, was not correct.
Why it matters: This is yet another claim for judicial review of APNs which has been dismissed by the High Court. The ground for review was, however, different from the previous challenges, as the claimants contended that they had not been aware of HMRC’s position. This was robustly rejected on the facts by the High Court.
‘With the previous grounds of challenge in Rowe et al lying at the bottom of the ocean, this time the taxpayer argued that the taxpayer had not known what HMRC’s position actually was, because the designated HMRC officer had not actually made a determination, which was a necessary requirement for the issue of an APN. Charles J, however, held that HMRC had not abandoned its primary argument that the claim for corporation tax relief was not valid; and that the taxpayers were, in fact, aware of HMRC’s view, which had been published. Looking at the position in the round, the APN did specify an amount which had been determined to the best of the designated officer’s information and belief. This amount was equal to the asserted amount, which was not a relief from corporation tax resulting from the EFRBS arrangements undertaken by the taxpayer; and so the necessary condition for the issue of the APNs had been made out’ (Patrick Cannon, Tax Journal, 9 September 2016).
In R (on the application of Ingenious Media Holdings and another) v HMRC [2016] UKSC 54 (19 October 2016), the Supreme Court found that HMRC had breached its duty of confidentiality when discussing film partnerships with the press and that such a breach could not be justified.
Mr McKenna, a former senior partner of a global firm of chartered accountants, had devised film investment schemes involving film production partnerships. On 14 June 2012, the permanent secretary for tax in HMRC, David Hartnett, had given an interview about tax avoidance to two financial journalists from The Times. On 21 June 2012, The Times had published two articles, one of which read: ‘Mr McKenna … and [X] are the two main providers of film investments schemes in the UK … Mr McKenna, 56, founder of Ingenious Media, is also involved in a long-running Revenue inquiry into three of his partnerships.’
The reasons given by Mr Hartnett for the disclosures were that it was generally in HMRC’s interests to try to establish good relations with the financial press; that they provided a way of emphasising to the general public HMRC’s views on elaborate tax avoidance schemes; and that Mr Hartnett thought that the journalists might have information of significant value to HMRC, which they might reveal as the dialogue continued. Mr Hartnett also emphasised that the interview had been agreed to be off the record.
Under the Commissioners for Revenue and Customs Act 2005 s 18(1), HMRC may not disclose information it holds in connection with its function.
Ingenious Media had brought a claim for judicial review of the disclosures.
Both the High Court and the Court of Appeal had found that the disclosures had not been in connection with a function of HMRC; and that they had been made for the purpose of a function of HMRC, so that s 18(1) did not apply by virtue of s 18(2)(a)(i). The Supreme Court considered, however, that in passing the 2005 Act, Parliament could not be supposed to have envisaged that by s 18(2)(a)(i) ‘it was authorising HMRC officials to discuss its views of individual taxpayers in off the record discussions, whenever officials thought that this would be expedient for some collateral purpose connected with its functions, such as developing HMRC’s relations with the press’.
The Supreme Court added that the fact that the interview had been agreed to be ‘off the record’ did not change the position. ‘An impermissible disclosure of confidential information was no less impermissible just because the information was passed on in confidence; every schoolchild knew that.’
Why it matters: Reversing the decisions of the lower courts, the Supreme Court found that HMRC’s breach of its duty of confidentiality could not be justified by its stated goal of fostering good relationships with the financial press. The Commissioners for Revenue and Customs Act 2005 s 18(2)(a)(i) could not be read as giving HMRC a discretion so wide that it would ‘emasculate’ its duty of confidentiality.
‘The judgment emphasises that HMRC’s duty of confidentiality is a fundamental duty owed to the taxpayer and aligned with the common law duty. In practice, it is likely that HMRC will now be increasingly wary of making disclosures, unless they fall squarely within a specific exclusion or are overwhelmingly justified … The fact that the court refocused the discussion onto a question of common law breach of confidentiality means that the strength of the judicial review application was not addressed. Arguably, it was even implicit in Lord Toulson’s judgment that HMRC might actually have succeeded were this a matter of public law. If a court will not intervene into actions taken by HMRC that represent a clear breach of confidentiality and a matter of “serious concern”, then what purpose does judicial review serve?’ (Gideon Sanitt, Tax Journal, 28 October 2016).
In HMRC v MG Rover Group Ltd; Standard Chartered plc v HMRC [2016] UKUT 434 (19 October 2016), the UT found that VATA 1994 s 43 required, as permitted by the Principal VAT Directive art 4(4), repayment rights under VATA 1994 s 80 to be held only by the representative member both before and after the relevant trader had left the group, or the group had been dissolved.
The decisions of the FTT, in Standard Chartered Plc v HMRC; Lloyds Banking Group Plc v HMRC [2014] UKFTT 316 and MG Rover Group Ltd v HMRC, BMW (UK) Holdings and Rover Company Ltd v HMRC [2014] UKFTT 327, turned on the interaction between the grouping provisions in VATA 1994 s 43, when a company moved into or out of a VAT group, and the entitlement to repayment under VATA 1994 s 80.
It had been directed that all the appeals be heard together. The UT found that the scheme created by s 43 complied with art 4(4). The transactions undertaken by each member were treated as if undertaken by one person, so that each individual member was no longer a taxable person and intra group transactions were disregarded. This satisfied the requirement that members were treated as if they were a single person. Consequently, VATA 1994 provided only the representative member with the associated rights to make a claim under s 80. This meant that transactions which had taken place while a VAT group had existed, did not cease to be subject to that regime when a member left the group or a group was disbanded.
Why it matters: Two FTTs had reached differing views on this question, deciding in the case of Lloyds and Standard Chartered that the claim remained with the VAT group, but in MG Rover and BMW that the claim belonged to the former member. The UT observed that VATA 1994 s 43 provided a two stage process. At the first stage, the VAT rights and obligations of a notional single person were determined. At the second stage, those rights and obligations were attributed to the member who had been treated as that single person; the representative member of the group.
‘Businesses and advisers will therefore need to pay close attention to who is entitled to submit any bad debt relief claim, once the RWS (real world supplier) is separate from the VAT group it was in at the time the sales were made. Indeed, the UT judges suggest that arrangements could be made to ensure that the RWS receives the benefit of any bad debt relief or VAT repayment claim when it leaves the group (assuming all parties are agreeable to that)’ (Sian Beusch, Tax Journal, 17 November 2016).
