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Tax and the Supreme Court in 2023

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From the VAT status of digital newspapers, to being ensnared by deeming rules and even entertaining a case concerning Danish tax fraud, this year has seen some interesting issues arise for determination by the Supreme Court in tax cases. One clear theme emerges from these very divergent cases: although its conclusions may not be universally welcomed, the Supreme Court does strive to cut through complexity and unnecessary argument to find a workable and straightforward interpretation of the law.

Like London buses…

My ‘One minute with’ published earlier in the year (Tax Journal, 17 March 2023) noted with regret how few tax cases appeared to be reaching the highest court in the land. Perhaps the Supreme Court justices subscribe to Tax Journal, as the court heard no fewer than eight tax cases in 2023. This article provides a whistle-stop tour of each of those cases (save for one, PGMOL v HMRC [2021] EWCA Civ 1370, which has yet to be determined), drawing together (at least one) common thread, namely the way in which seemingly complex disputes are reduced to simple questions of law, and answered in the narrowest possible way. 

Limiting the ‘always speaking’ principle

Under VATA 1994 Sch 8 Group 3 item 2, ‘newspapers’ are zero-rated, meaning VAT is not charged on them. The question in News Corp UK & Ireland Ltd v HMRC [2023] UKSC 7 was whether, between 30 August 2010 to 4 December 2016, zero-rating extended beyond print newspapers to digital editions of newspapers, such as editions for e-readers, tablets, smartphones and websites.

The key questions in the appeal were whether (i) the ‘always speaking’ doctrine could apply so as to bring digital newspapers within the definition and (ii) whether EU law applied to narrow the scope of the ambit.

The Supreme Court held that the starting point in interpreting the word ‘newspapers’, was the ordinary meaning of the word in its context as at 31 December 1975. Article 110 of the Principal VAT Directive 2006/112 (the ‘standstill provision’), required that categories of zero-rating could not be expanded or extended beyond those which existed on 31 December 1975. The word ‘newspapers’ at that time referred only to printed newspapers. Although the purpose of the provision was satisfied by digital editions in the same way as by printed editions, the fact the same social purpose may be served by zero-rating two related items does not mean they should, or will be, treated the same way. 

From the perspective of EU law, the purpose of the standstill provision tolerating the maintenance of zero ratings was to prevent social hardship likely to follow from the abolition of existing national law exemptions. Yet no social hardship could follow from the exclusion of digital editions from the ambit of the standstill provisions as, at the time, nobody had access to them. Moreover, the zero-rating for newspapers was seen as a transitional phase with the ultimate purpose being harmonisation with no derogations at all. The court held that this purpose, consistently with the strict approach to exemptions and the effect of the standstill provision, indicated that a narrow meaning should be given to the word ‘newspapers’, and therefore has a limiting effect on the application of the ‘always speaking’ principle.

Avoiding circularity in anti-avoidance

The anti-avoidance provisions in VATA 1994 Sch 10 paras 12–17, are intended to prevent partly exempt businesses from obtaining a VAT cash-flow advantage in relation to expenditure of at least £250,000 plus VAT on land and buildings. The legislation refers to ‘a capital item for the purposes of the relevant regulations’, which is a reference to the capital goods scheme regulations. It was common ground in Mouldsdale Properties v HMRC [2023] UKSC 12, that the anti-avoidance legislation, as drafted, results in a circularity issue (and this point is recognised by HMRC in their VAT Land and Property Manual at VATLP23500). 

The Supreme Court’s view in the appeal was that the effect of the provisions as drafted appears to be that if the taxpayer, Mr Moulsdale, intended or expected to add VAT to the price he was charging for the land, then VAT was not chargeable on the sale, so he did not need to add VAT. But if Mr Moulsdale did not intend or expect that the purchaser would pay VAT on the price, then the transaction was liable to VAT and so he ought to have added VAT to the purchase price. In essence, the court reached its conclusion by deciding that, when considering whether the anti-avoidance provisions apply to the grant of an interest in land or buildings, the value of the grant itself should be ignored. In other words, the way to avoid circularity is by treating the reference to a capital item in the anti-avoidance provisions as a reference to a capital item other than the one which arises on the grant.

Light at the end of the tunnel 

In HMRC v SSE Generation Ltd [2023] UKSC 17, there were conduits of various kinds that channelled water to a main reservoir: (i) the headrace that carried water under increasing pressure from the reservoir to the turbine; and (ii) the tailrace and tunnels that carried water away from the turbine. It was common ground that all of the disputed items were ‘plant’ according to its common law definition, so the only issue was whether the expenditure was excluded by CAA 2001 s 22, i.e. whether the items in dispute were ‘tunnels’ or ‘aqueducts’ within List B. If they were not, then the expenditure on the items qualified for capital allowances. 

The Supreme Court confirmed the decision of the Court of Appeal that ‘tunnel’ meant a subterranean passage for a way to pass through. There was no clear, single ordinary meaning of the word, so that the context would identify which meaning was intended. The items in List B were grouped thematically, and item 1 (tunnel, bridge, viaduct, aqueduct, embankment or cutting) contained structures relating to the construction of transportation routes or ways. Items 2 and 3 listed transportation assets relating to movement by land and water, and so on. 

The court rejected HMRC’s argument that ‘aqueduct’ simply meant a water conduit. The term was listed in item 1 immediately after ‘bridge, viaduct’ and in that context it connoted a bridge-like structure for carrying water. The general transportation theme of item 1 did not require that the meaning should be limited to canals. Unlike the other words in item 1, ‘aqueduct’ specifically identified what the way was for (i.e. water). This justified a wider meaning without undermining the general theme in item 1. 

Narrow interpretation for exemption

In order for the financial services exemption under article 135(1)(d) of the Principal VAT Directive to apply, services must have the effect of transferring funds and changing the legal and financial situation of the relevant parties. The taxpayer and HMRC in Target Group Ltd v HMRC [2023] UKSC 35 disagreed on the proper interpretation of the case law as to whether causal effect was sufficient for these purposes (the wider interpretation) or if the services must in themselves have that effect and make that change (the narrow interpretation). 

The Supreme Court concluded that the narrow interpretation is consistent with the principle that exemptions should be interpreted strictly. It described the domestic law as having taken ‘a wrong turn’ in FDR Ltd [2000] STC 672 and concluded FDR, and several other Court of Appeal cases which followed FDR, must be overruled. The giving of instructions was not enough to constitute ‘transactions concerning payments or transfers’ within article 135(1)(d), even if it inevitably resulted in a payment or transfer. According to the Supreme Court, functional participation and performance is required. In light of the narrow approach to construction adopted, it is difficult to see how a loan service provider supplying outsourced functions to a bank, after the bank has originated the loan, could show its supplies should be exempt.

Running out of options 

Mr Noble owned and was a director of Quest, a consultancy company. In 2006, Quest provided corporate advisory services to Vermilion in return for the grant of a share option. When Vermilion subsequently came into financial difficulty, it was crucial to the success of a rescue funding exercise that Mr Noble became a director of Vermilion and that the 2006 option in favour of Quest was replaced with a new option (the ‘2007 option’) on amended terms and in favour of Quest as Mr Noble’s nominee. In 2016, this option was novated replacing Quest with Mr Noble as the holder and the option was exercised. 

A key issue in Vermilion Holdings Ltd v HMRC [2023] UKSC 37 was the interaction between subsections (1) and (3) of ITEPA 2003 s 471. Section 471 defines when ITEPA 2023 Part 7 Chapter 5 relating to securities options applies. Subsection (1) states that it applies ‘where a right or opportunity to acquire the securities option is available by reason of an employment’. Subsection (3) provides that, where such a right or opportunity is made available by a person’s employer, it ‘is to be regarded for the purposes of subsection (1) as available by reason of an employment’.

The Supreme Court noted that s 471(1) is a causal test and can lead to difficult judgements and different assessments. The Court held that the purpose of the deeming provision in s 471(3) is to create a bright line rule to avoid such difficult questions. It asks ‘who’ conferred the right or opportunity and not ‘why’. If s 471(3) applies, there is no need to consider s 471(1). The purpose of the deeming provision was said to avoid the decision-maker having to carry out the s 471(1) assessment. In this case, Vermilion was Mr Noble’s employer at the time the option was made available to his nominee and Vermilion’s reason for doing so is irrelevant. On the facts, it was fatal that the 2006 option was cancelled and replaced with the 2007 option at a time when Mr Noble was an employee of Vermilion, rather than the option being varied, as this brought it within the deeming provision. The court was able to apply its conclusions straightforwardly to the facts of the case; but other instances where a right or opportunity to acquire securities options arise, may produce unintended consequences (albeit the court may have left space for the deeming rule not to apply in ‘absurd’ cases). 

Dicey rule 3

Skatteforvaltningen (‘SKAT’), the Danish Customs and Tax Administration, issued claims in England and Wales against a number of parties, including the appellants in SKAT v Solo Capital Partners LLP and others [2023] UKSC 40. In its claims, SKAT alleges that these parties have submitted fraudulent applications for tax refunds to which they were never entitled. However, when SKAT brought proceedings in the Commercial Court in England and Wales, the appellants defended the claims on the basis that they were protected by a principle of private international law, under which claims which seek to enforce the tax law of a foreign state, whether directly or indirectly, are inadmissible before courts in this jurisdiction. This principle is known as the revenue rule.

On the scope of the revenue rule, the court found that the rule only applies to proceedings in which there is an unsatisfied demand for tax which foreign tax authorities seek directly or indirectly to recover. In short, although the rule encompasses claims to recover tax which have been fraudulently evaded, that does not apply in this case where the recipients of the ‘refunds’ of Danish withholding tax were never required to pay Danish tax. In other words, there has never been an unsatisfied demand for tax by the Danish tax authorities. Rather, the case involves simple fraud, i.e. claims for refunds to which there was no entitlement. As the chancellor in the Court of Appeal had stated (and the Supreme Court agreed), whilst SKAT thought it was making repayments or refunds to applicants (because it was induced to do what it did by fraud), they were not in fact repayments or refunds at all, but abstraction of monies by the fraudsters, in the same way as if they had broken into SKAT’s safe and stolen the monies. So too could an attempt to recover those stolen monies be entertained by the courts in England and Wales. 

The recipients also tried unsuccessfully to argue that SKAT’s claims were inadmissible under the sovereign authority rule (a principle of international law which would prevent the court from enforcing a claim based on foreign public law if the claim involved the exercise or assertion of a sovereign right). This too was rejected by the court. It held the substance of the claims does not involve any act of a sovereign character, any exercise or enforcement of a sovereign right, or any vindication of sovereign power. SKAT, in seeking to recover money of which it alleges it has been defrauded, is following a course that would be open to any private individual who has been similarly defrauded.

Laws to scare people?

As the Supreme Court noted in Fisher v HMRC [2023] UKSC 44, the transfer of assets abroad (TOAA) provisions have been the subject of litigation in the senior courts almost from the moment they were first introduced into the tax code by FA 1936. They have been amended over the decades and re-enacted in consolidating legislation (now found in ITA 2007 Part 13 Chapter 2). But they have continued to perplex and concern generations of judges faced with the task of construing them. 

In broad terms, ICTA 1988 s 739 is an anti-avoidance provision that applies where an individual resident in the UK transfers assets abroad with the result that income arising from those assets becomes payable to a person abroad. I won’t repeat the facts of the Fisher case here, as this was examined in detail earlier this month (‘Certainty vs deterrence’ (Ben Elliott), Tax Journal, 1 December 2023),  but the Supreme Court held that s 739 is limited to charging individuals who transfer assets abroad, and the changes made to the legislation since the seminal case of Vestey [1980] AC 1148 do not undermine the reasoning in that case. The severe effect of s 739 for a taxpayer means that it is inappropriate to apply it to someone who was not the transferor. The presence of s 742(9), which extends the reference to ‘an individual’ in s 739 to include the spouse of the individual, was inconsistent with HMRC’s proposed interpretation, as there would be no need for the spousal extension if everyone who has the power to enjoy the income could be charged regardless of whether they are a transferor or not. Similarly, the inclusion of s 740, which deals with the liability of non-transferors, was held to weigh against a wider interpretation of s 739.

Importantly, the Supreme Court held that s 739 does not apply to an individual in relation to a transfer made by a company in which they are a shareholder, regardless of the size of their shareholding. That is because, in particular, there are no principled criteria set out in the statute which can be used to determine the circumstances in which a shareholder should be treated as responsible for a transfer made by a company. In contrast with other statutory regimes, the TOAA code does not provide any framework for determining when an individual should be treated as controlling a company for this purpose. The existence of multiple transferors for the purposes of s 739 would cause numerous difficulties in the provision’s application. The Supreme Court did not take kindly to HMRC’s approach on this issue, holding, (at para 76) that:

‘At some points [HMRC] seemed to be suggesting that this degree of uncertainty about when and to whom the charge applied was a positive virtue of the drafting. The provision was, he said, designed to discourage people from moving assets abroad with a tax avoidance purpose ... The penal provision works better to achieve its aim if taxpayers are unable to know whether they would be caught or not. HMRC could then assess them to tax on the income of the overseas person, leaving the taxpayer to try to convince HMRC or the tribunal on appeal that they were not transferors. That is, in my judgment, an improper argument for HMRC to run. It has a flavour of the same unconstitutional approach to the enforcement of these provisions that was so strongly deprecated in Vestey. I agree with Mr Afzal’s submission in response when he said that the law cannot be left in some unclear state “just to scare people”.’

In light of its decision that the taxpayers were not transferors, the court did not give judgment on the arguments concerning the motive defence, whether TOAA only applies to income tax pre-2005, or the application of EU law.


2023 was a busy year for the Supreme Court in determining tax cases and, given the sheer breadth of issues that can arise for determination, and the (usually) wider significance that a determination of the issues presents, tax is likely to be something that keeps the court busy for many more years to come. One thing that is likely to remain consistent, however, is the court’s eagerness to narrow the scope of the issues it needs to address, hold its view as closely as possible to the purpose and policy of the statute, but regularly leave leeway for peripheral or exceptional cases to be decided out with the main parameters of its holding (as judicial straightjackets are never a good look).