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 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.
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