In HMRC v Investment Trust Companies [2017] UKSC 29 (11 April 2017), the Supreme Court found that investment trusts that had paid VAT to their managers, which had turned out not to be due, did not have a common law claim in restitution against HMRC.
Between 1992 and 2002, the claimants, closed-ended investment funds, had received supplies of investment management services from their investment managers. At the time, the supplies had been treated as taxable by the UK’s VAT legislation, which had incorrectly transposed the Sixth VAT Directive article 13B(d)(6), as later established by the CJEU in JP Morgan Fleming Claverhouse Investment Trust (Case C-363/05). Output VAT had therefore been accounted for on those supplies and input tax deducted. The supplies were, however, exempt under the directive. Following Fleming [2008] UKHL 2, the managers were refunded the VAT they had paid to HMRC subject to two exceptions. They could not make claims in relation to accounting periods ending on or after December 1996, as these were time barred under VATA 1994 s 80(4); and the amounts repaid to the managers were calculated on the basis that, under s 80(2A), the input tax they had deducted should be set off against the output tax repayment. The managers passed on the amounts refunded to the claimants.
There were three issues: (1) Did the claimants have a common law claim against HMRC based on unjust enrichment (subject to any statutory exclusion)? (2) If so, did VATA 1994 s 80 bar such a claim? (3) If the claimants had no claim against HMRC, either because no such claim was recognised at common law or because a common law claim was barred by s 80, was that compatible with EU law?
The Supreme Court first had to decide whether HMRC had been enriched in the full amount of output tax due by the managers or only to the extent of the amounts actually paid by the managers, after deduction of input tax. The Supreme Court found that the managers could not both claim reimbursement of the output tax which they had paid to HMRC under VATA 1994 s 80 on the basis that their supplies were exempt from VAT, and simultaneously assert an entitlement to retain the amounts which they had deducted as input tax, on the basis that their supplies were taxable. The court concluded that HMRC’s enrichment was only to the extent of the net amount it had received.
The court then had to decide whether HMRC’s enrichment had been at the claimants’ expense. The court observed that ‘a claim based on unjust enrichment does not create a judicial licence to meet the perceived requirements of fairness on a case-by-case basis’; that it should not make ‘tabula rasa’ of all judicial principles; and that the words ‘at the expense of’ did not express a statutory legal test. Finally, the court noted that the doctrine of unjust enrichment aims to restore a balance, which has been disrupted. The court held that HMRC’s unjust enrichment had not been at the expense of the claimants. There had been no connection between the claimants and HMRC and it was impossible to trace their payments to the managers into the VAT payments made by managers to HMRC. The fact that the claimants bore the cost of the undue tax paid by the managers to HMRC did not entitle them to restitution from HMRC. In relation to the second issue, the court found that the scheme created by s 80 was inconsistent with the existence of a concurrent non-statutory liability on the part of HMRC to make restitution to consumers. It followed that s 80 barred claims by consumers.
Finally, the court noted that the CJEU had accepted that a system under which only the supplier was entitled to seek reimbursement of VAT from the tax authorities, and the consumer could seek restitution from the supplier, met the requirements of EU law (Reemtsma (Case C-35/05)).
Why it matters: The claimants were claimants for a number of investment funds and the tests previously adopted by the courts, when deciding whether enrichment had been ‘at the expense’ of a claimant, seemed unsatisfactory. The Supreme Court therefore noted: ‘It would be unwise to attempt in this appeal to arrive at a definitive statement of the circumstances in which the enrichment of a defendant can be said to be at the expense of the claimant. Nevertheless, in view of the uncertainty which has resulted from the use of vague and generalised language, this court has a responsibility to establish more precise criteria.’ This case will be an important reference.ion.
Hancock: scheme failed
In A and T Hancock v HMRC [2017] EWCA Civ 198 (25 May 2017), the Court of Appeal found that a scheme intended to operate as a reorganisation within the scope of TCGA 1992 ss 126 to 130 should be treated as two separate conversions, so that the gain did not disappear ‘in a puff of smoke’.
Mr and Mrs Hancock had sold the entire share capital of their company, Blubeckers Ltd, to another company and the consideration had consisted in loan notes issued by the purchasing company. The loan notes provided for a repayment in US dollars at an exchange rate other than the one prevailing at the date of redemption. They were therefore not qualifying corporate bonds (QCBs) for the purpose of TCGA 1992 s 117. The sale agreement also included provision for further consideration, depending on the subsequent performance of Blubeckers Ltd. The couple received further loan notes under this provision. These further notes initially also included a provision enabling the noteholders to require repayment in US dollars; however, that provision was removed by deeds of variation, with the result that these further notes did constitute QCBs. Both sets of loan notes were then exchanged for two secured discounted loan notes, which were QCBs and were eventually redeemed for cash.
The issue was whether the redemption of the loan notes had generated a chargeable gain in respect of the capital gain accruing on the total value of the secured discounted loan notes or only on a small proportion of that value. This depended on the interpretation of TCGA 1992 s 116. The Hancocks contended that there had been only one conversion, so that the original gain (realised on the disposal of the shares) had been rolled into exempt QCBs.
The Court of Appeal first noted that the reorganisation provisions did not apply directly to the transaction, because the input side (what goes in) of a reorganisation can only include shares and is therefore fiscally homogeneous. It added, however, that s 132(1) provides for the applications of ss 127 to 131 ‘with any necessary adaptations’ in relation to the conversion of securities. The court therefore wondered whether, in a conversion of securities, as distinct from a reorganisation, it is permissible to aggregate securities together, so that the input side of a conversion may include both taxable and exempt securities. When considering whether this was the right approach, it examined the impact of permitting the aggregation of fiscally different inputs on the operation of the scheme as a whole.
If the Hancocks’ argument was correct, transactions which include QCBs and non-QCBs on the input side and QCBs on the output side are excluded from the operation of s 116 by s 116(1)(b). The effect would be that the chargeable gain which had accrued on the non-QCBs would escape CGT altogether. This would be, as Neuberger J put it in Jenks [1997] STC 853, ‘contradictory to the evident purpose of the relevant statutory provisions’. This was therefore not the right reading of s 116. This unsuitable result would, however, not be possible if the conversions of QCBs and non-QCBs were treated separately because of their different tax status, as s 116(1) (b) would not block the application of s 116 to those separate transactions. This was justified as a ‘necessary adaptation’.
Why it matters: Lord Justice Floyd accepted that the drafting of s 116(1) is anomalous. However, he considered that s 116(1)(b) is an ‘isolated drafting anomaly inconsistent with the rest of the scheme’ and that it should not be ‘determinative of the proper interpretation of the statutory scheme, in a way which is completely contrary to its overall purpose’.
Coal Staff: Brexit and references to the CJEU
In Coal Staff Superannuation Scheme Trustees v HMRC [2017] UKUT 137 (27 June 2017), the UT refused to make a reference to the CJEU despite the imminence of Brexit.
The substantive issue was whether HMRC’s refusal to repay foreign withholding tax suffered on overseas manufactured dividends (MODs), which were exempt from UK tax, amounted to a restriction on the free movement of capital, in the absence of any possibility of set off.
The trustees applied to the UT for a reference to the CJEU, following the dismissal of their appeal by the FTT. They argued that the sole issue that arose in the appeal related to the compatibility of the relevant domestic law with the requirements of EU law. They accepted that it would be unusual for the UT to make a reference to the CJEU without first hearing the appeal but they contended (referring to Brexit) that we live ‘in unusual times’.
The UT agreed that the appeal raised issues of EU law which were not acte clair and that the government did intend to end the jurisdiction of the CJEU in the UK. However, the UT also pointed out that the transitional Brexit provisions were not known; they would need to apply to those in the course of litigation relating to directly applicable EU law at the time of exit.
There was no reason to make the sought reference before the hearing. It noted, inter alia, that this would only be justified if the tribunal felt that it would not be able to resolve the issues with complete confidence. Furthermore, as the case had a historical interest only (since the MOD regime had been abolished), it was unlikely to have repercussions beyond its own facts.
Why it matters: The UT said: ‘The trustees’ submissions in this application invite me to assume that the arrangements that the government will make for resolving disputes about the interpretation and application of EU law that are pending at the date of UK’s exit will be so unsatisfactory that the tribunal should change its usual practice and accelerate the making of references to prevent that situation arising wherever possible. I am not prepared to make that assumption.’
Vrang: levy under the UK/Switzerland agreement
In K Vrang v HMRC [2017] EWHC 1055 (9 May 2017), the High Court found that the claimant was not entitled to the refund of an amount levied on her undisclosed Swiss bank account.
Ms Vrang was a Swedish national who worked in London. She had three bank accounts in Switzerland, with Credit Suisse (CS), into which she put her earnings. CS sent her two letters in 2012 alerting her to the agreement ‘on cooperation in the area of taxation’ between Switzerland and the UK. It warned that if she did not give voluntary disclosure of her CS accounts to HMRC, CS would take from her accounts an unspecified one-off payment, calculated by reference to a formula in the agreement. She took no action in response to those letters and CS took over £58,000 from her account. Ms Vrang appealed to the High Court against HMRC’s refusal to refund the monies.
The court observed that the one-off payment was calculated, levied and paid to HMRC in accordance with the agreement; the fact that FA 2012 (implementing the agreement into UK law) did not expressly provide for such a levy did not make it unlawful. In any event, the levy was impliedly approved by Parliament, since the receipt of the sums led to the operation of Sch 36 para 6. Similarly, Parliament must have known that, in the absence of disclosure, there could be no assessment of liability; the levy bore no connection to an assessed tax liability. The absence of provision for refund was ‘an inevitable consequence of the agreement, rather than of parliamentary oversight’.
The claimant’s arguments under ECHR were also roundly rejected: ‘There was no requirement that, to be proportionate, a late and careless levy payer should be able to disclose free of the structure of the agreement, and then claim a refund.’
Finally, the court found that HMRC’s discretionary refund policy was lawful in that it excluded cases where the responsibility for their difficulties lay squarely with the levy payers.
Why it matters: The High Court observed that: ‘Ministers may not have anticipated that the generally compliant taxpayers would have failed to opt for voluntary disclosure where that was in their interests, but this supported rather than confounded the view that Parliament and government understood how the legislation was framed and intended to work.’
In HMRC v Investment Trust Companies [2017] UKSC 29 (11 April 2017), the Supreme Court found that investment trusts that had paid VAT to their managers, which had turned out not to be due, did not have a common law claim in restitution against HMRC.
Between 1992 and 2002, the claimants, closed-ended investment funds, had received supplies of investment management services from their investment managers. At the time, the supplies had been treated as taxable by the UK’s VAT legislation, which had incorrectly transposed the Sixth VAT Directive article 13B(d)(6), as later established by the CJEU in JP Morgan Fleming Claverhouse Investment Trust (Case C-363/05). Output VAT had therefore been accounted for on those supplies and input tax deducted. The supplies were, however, exempt under the directive. Following Fleming [2008] UKHL 2, the managers were refunded the VAT they had paid to HMRC subject to two exceptions. They could not make claims in relation to accounting periods ending on or after December 1996, as these were time barred under VATA 1994 s 80(4); and the amounts repaid to the managers were calculated on the basis that, under s 80(2A), the input tax they had deducted should be set off against the output tax repayment. The managers passed on the amounts refunded to the claimants.
There were three issues: (1) Did the claimants have a common law claim against HMRC based on unjust enrichment (subject to any statutory exclusion)? (2) If so, did VATA 1994 s 80 bar such a claim? (3) If the claimants had no claim against HMRC, either because no such claim was recognised at common law or because a common law claim was barred by s 80, was that compatible with EU law?
The Supreme Court first had to decide whether HMRC had been enriched in the full amount of output tax due by the managers or only to the extent of the amounts actually paid by the managers, after deduction of input tax. The Supreme Court found that the managers could not both claim reimbursement of the output tax which they had paid to HMRC under VATA 1994 s 80 on the basis that their supplies were exempt from VAT, and simultaneously assert an entitlement to retain the amounts which they had deducted as input tax, on the basis that their supplies were taxable. The court concluded that HMRC’s enrichment was only to the extent of the net amount it had received.
The court then had to decide whether HMRC’s enrichment had been at the claimants’ expense. The court observed that ‘a claim based on unjust enrichment does not create a judicial licence to meet the perceived requirements of fairness on a case-by-case basis’; that it should not make ‘tabula rasa’ of all judicial principles; and that the words ‘at the expense of’ did not express a statutory legal test. Finally, the court noted that the doctrine of unjust enrichment aims to restore a balance, which has been disrupted. The court held that HMRC’s unjust enrichment had not been at the expense of the claimants. There had been no connection between the claimants and HMRC and it was impossible to trace their payments to the managers into the VAT payments made by managers to HMRC. The fact that the claimants bore the cost of the undue tax paid by the managers to HMRC did not entitle them to restitution from HMRC. In relation to the second issue, the court found that the scheme created by s 80 was inconsistent with the existence of a concurrent non-statutory liability on the part of HMRC to make restitution to consumers. It followed that s 80 barred claims by consumers.
Finally, the court noted that the CJEU had accepted that a system under which only the supplier was entitled to seek reimbursement of VAT from the tax authorities, and the consumer could seek restitution from the supplier, met the requirements of EU law (Reemtsma (Case C-35/05)).
Why it matters: The claimants were claimants for a number of investment funds and the tests previously adopted by the courts, when deciding whether enrichment had been ‘at the expense’ of a claimant, seemed unsatisfactory. The Supreme Court therefore noted: ‘It would be unwise to attempt in this appeal to arrive at a definitive statement of the circumstances in which the enrichment of a defendant can be said to be at the expense of the claimant. Nevertheless, in view of the uncertainty which has resulted from the use of vague and generalised language, this court has a responsibility to establish more precise criteria.’ This case will be an important reference.ion.
Hancock: scheme failed
In A and T Hancock v HMRC [2017] EWCA Civ 198 (25 May 2017), the Court of Appeal found that a scheme intended to operate as a reorganisation within the scope of TCGA 1992 ss 126 to 130 should be treated as two separate conversions, so that the gain did not disappear ‘in a puff of smoke’.
Mr and Mrs Hancock had sold the entire share capital of their company, Blubeckers Ltd, to another company and the consideration had consisted in loan notes issued by the purchasing company. The loan notes provided for a repayment in US dollars at an exchange rate other than the one prevailing at the date of redemption. They were therefore not qualifying corporate bonds (QCBs) for the purpose of TCGA 1992 s 117. The sale agreement also included provision for further consideration, depending on the subsequent performance of Blubeckers Ltd. The couple received further loan notes under this provision. These further notes initially also included a provision enabling the noteholders to require repayment in US dollars; however, that provision was removed by deeds of variation, with the result that these further notes did constitute QCBs. Both sets of loan notes were then exchanged for two secured discounted loan notes, which were QCBs and were eventually redeemed for cash.
The issue was whether the redemption of the loan notes had generated a chargeable gain in respect of the capital gain accruing on the total value of the secured discounted loan notes or only on a small proportion of that value. This depended on the interpretation of TCGA 1992 s 116. The Hancocks contended that there had been only one conversion, so that the original gain (realised on the disposal of the shares) had been rolled into exempt QCBs.
The Court of Appeal first noted that the reorganisation provisions did not apply directly to the transaction, because the input side (what goes in) of a reorganisation can only include shares and is therefore fiscally homogeneous. It added, however, that s 132(1) provides for the applications of ss 127 to 131 ‘with any necessary adaptations’ in relation to the conversion of securities. The court therefore wondered whether, in a conversion of securities, as distinct from a reorganisation, it is permissible to aggregate securities together, so that the input side of a conversion may include both taxable and exempt securities. When considering whether this was the right approach, it examined the impact of permitting the aggregation of fiscally different inputs on the operation of the scheme as a whole.
If the Hancocks’ argument was correct, transactions which include QCBs and non-QCBs on the input side and QCBs on the output side are excluded from the operation of s 116 by s 116(1)(b). The effect would be that the chargeable gain which had accrued on the non-QCBs would escape CGT altogether. This would be, as Neuberger J put it in Jenks [1997] STC 853, ‘contradictory to the evident purpose of the relevant statutory provisions’. This was therefore not the right reading of s 116. This unsuitable result would, however, not be possible if the conversions of QCBs and non-QCBs were treated separately because of their different tax status, as s 116(1) (b) would not block the application of s 116 to those separate transactions. This was justified as a ‘necessary adaptation’.
Why it matters: Lord Justice Floyd accepted that the drafting of s 116(1) is anomalous. However, he considered that s 116(1)(b) is an ‘isolated drafting anomaly inconsistent with the rest of the scheme’ and that it should not be ‘determinative of the proper interpretation of the statutory scheme, in a way which is completely contrary to its overall purpose’.
Coal Staff: Brexit and references to the CJEU
In Coal Staff Superannuation Scheme Trustees v HMRC [2017] UKUT 137 (27 June 2017), the UT refused to make a reference to the CJEU despite the imminence of Brexit.
The substantive issue was whether HMRC’s refusal to repay foreign withholding tax suffered on overseas manufactured dividends (MODs), which were exempt from UK tax, amounted to a restriction on the free movement of capital, in the absence of any possibility of set off.
The trustees applied to the UT for a reference to the CJEU, following the dismissal of their appeal by the FTT. They argued that the sole issue that arose in the appeal related to the compatibility of the relevant domestic law with the requirements of EU law. They accepted that it would be unusual for the UT to make a reference to the CJEU without first hearing the appeal but they contended (referring to Brexit) that we live ‘in unusual times’.
The UT agreed that the appeal raised issues of EU law which were not acte clair and that the government did intend to end the jurisdiction of the CJEU in the UK. However, the UT also pointed out that the transitional Brexit provisions were not known; they would need to apply to those in the course of litigation relating to directly applicable EU law at the time of exit.
There was no reason to make the sought reference before the hearing. It noted, inter alia, that this would only be justified if the tribunal felt that it would not be able to resolve the issues with complete confidence. Furthermore, as the case had a historical interest only (since the MOD regime had been abolished), it was unlikely to have repercussions beyond its own facts.
Why it matters: The UT said: ‘The trustees’ submissions in this application invite me to assume that the arrangements that the government will make for resolving disputes about the interpretation and application of EU law that are pending at the date of UK’s exit will be so unsatisfactory that the tribunal should change its usual practice and accelerate the making of references to prevent that situation arising wherever possible. I am not prepared to make that assumption.’
Vrang: levy under the UK/Switzerland agreement
In K Vrang v HMRC [2017] EWHC 1055 (9 May 2017), the High Court found that the claimant was not entitled to the refund of an amount levied on her undisclosed Swiss bank account.
Ms Vrang was a Swedish national who worked in London. She had three bank accounts in Switzerland, with Credit Suisse (CS), into which she put her earnings. CS sent her two letters in 2012 alerting her to the agreement ‘on cooperation in the area of taxation’ between Switzerland and the UK. It warned that if she did not give voluntary disclosure of her CS accounts to HMRC, CS would take from her accounts an unspecified one-off payment, calculated by reference to a formula in the agreement. She took no action in response to those letters and CS took over £58,000 from her account. Ms Vrang appealed to the High Court against HMRC’s refusal to refund the monies.
The court observed that the one-off payment was calculated, levied and paid to HMRC in accordance with the agreement; the fact that FA 2012 (implementing the agreement into UK law) did not expressly provide for such a levy did not make it unlawful. In any event, the levy was impliedly approved by Parliament, since the receipt of the sums led to the operation of Sch 36 para 6. Similarly, Parliament must have known that, in the absence of disclosure, there could be no assessment of liability; the levy bore no connection to an assessed tax liability. The absence of provision for refund was ‘an inevitable consequence of the agreement, rather than of parliamentary oversight’.
The claimant’s arguments under ECHR were also roundly rejected: ‘There was no requirement that, to be proportionate, a late and careless levy payer should be able to disclose free of the structure of the agreement, and then claim a refund.’
Finally, the court found that HMRC’s discretionary refund policy was lawful in that it excluded cases where the responsibility for their difficulties lay squarely with the levy payers.
Why it matters: The High Court observed that: ‘Ministers may not have anticipated that the generally compliant taxpayers would have failed to opt for voluntary disclosure where that was in their interests, but this supported rather than confounded the view that Parliament and government understood how the legislation was framed and intended to work.’
