European Court of Human Rights

Hobbs & Ors v UK (Application No. 63469/00, 63475/00, 63484/00 and 63684/00)

This European Court of Human Rights case deals with the question of whether refusal by the Inland Revenue for claims by four widowers for the UK widow's bereavement allowance was discriminatory under the European Convention on Human Rights (ECHR).

Prior to the introduction of independent taxation in 1990-91, married couples were taxed as a single entity and a man was entitled to a married man's allowance in respect of his wife's earnings which he could claim in the year of his wife's death. The aim of the widow's bereavement allowance (WBA), introduced in 1980, was to enable widowed women to claim the equivalent of the married man's allowance rather than being restricted to the single person's allowance. When the new regime of independent taxation was introduced, widows received an unjustified advantage over the wider population (not just widowers). The WBA was abolished for deaths occurring on or after 6 April 2000.

The taxpayers were bereaved between 1995 and 1998. The taxpayers formally applied for WBA but each claim was rejected. The taxpayers brought a complaint before the European Court of Human Rights as another case had been unsuccessful under the Human Rights Act in the UK.

The European Court held that there had been a violation of the taxpayers' rights under the ECHR, but dismissed the taxpayers' claims for just satisfaction. The basis for dismissing the claim for just satisfaction was because widows were unduly favoured not only over widowers, but also over all other taxpayers, and hence there was no reason to remedy the inequality of treatment by “levelling up” and awarding the value of tax benefits which had been found to be unjustified.

On the basis that the taxpayers' claims for just satisfaction were dismissed, the relevance of this case for Ireland is negligible.

For further details, see page 35.

European Court of Justice

Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue [C-446/04]

Commentary on this case is available at Section 1.34 and for further details, see page 43.

UK Court of Appeal

Ali (t/a Vakas Balti) v R & C Commrs [2006] EWCA Civ 1572

This UK Court of Appeal case concerns the civil evasion penalty in the enforcement of the obligations of traders in respect of VAT.

The taxpayer was the sole proprietor of an Indian restaurant. He started trading before August 1996 but did not register for VAT. He was assessed for arrears of VAT for the first 12-month period in the sum of £6,971.95, based on turnover figures which he had disclosed. Later the Commissioners amended that assessment by increasing it to £14,284 to take account of business takings which were considered to have been concealed dishonestly by the taxpayer.

On 2 November 1999 a civil evasion penalty assessment for dishonest evasion of VAT for the 12-month period was notified in the sum of £14,284, less 10% mitigation for co-operation during the investigation. A civil evasion penalty may be imposed in any case where a person does any act or omits to take any action, for the purpose of evading VAT, and his conduct involves dishonesty, whether or not it is such as to give rise to criminal liability.

At the hearing before the VAT and Duties Tribunal, the Commissioners accepted that the amended tax assessment in the sum of £14,284 was invalid, and withdrew that assessment-there is no power to amend an assessment. According to the Tribunal, the right way to proceed would have been to issue either a supplementary assessment or, more likely, an additional assessment for the additional amount. By the time of the hearing it was too late to take either of these steps.

The taxpayer appealed to the UK High Court on the grounds that the civil evasion penalty could not be more than the tax owing and as the tax owing was held in the Tribunal to be £6, 971.95, the penalty should be no more than that. The High Court allowed the appeal.

In the Chancery Division, it was concluded that a civil evasion penalty is a sanction for dishonest conduct, rather than for failure to pay tax which is due. Hence, a penalty may be imposed even if no tax has been lost. It was held that it was open to the Commissioners to make a civil evasion penalty assessment on the basis of tax evaded of £14,284, subject to the 10% deduction for mitigation and so the Tribunal findings were restored.

This case is specific to the wording of the UK VAT legislation, in particular “a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded ” and so would not be directly relevant to Ireland.

For further details, see page 36.

Chancery Division

Shaw v R& C Commrs

This UK case deals with the availability of VAT input credit on motor vehicles. The Chancery Division held that the taxpayer had not provided sufficient evidence that he did not intend making the 4X4 motor vehicle available for personal use and as a result was not entitled to input credit on the purchase of the vehicle.

In the UK, there is specific legislation which provides for input credit on motor vehicles where the vehicle has been purchased with the intention that it would be used exclusively for business use and would not be made available for the private use of anyone. In this particular case, the taxpayer had insured the vehicle for personal use and even though all other facts in the case supported the intention to use the vehicle exclusively for business use, in the absence of evidence to the contrary, the insurance permitting private use was sufficient to show that the taxpayer intended to make that vehicle available for personal use. Be careful how you insure your motor vehicle.

Irish VAT legislation does not provide for the availability of VAT input credit on motor vehicles intended for exclusively for business use, so this case does not have direct relevance for Ireland.

For further details, see page 37.

Special Commissioners

Wilkinson v R & C Commrs

In this UK Special Commissioners case, the taxpayer claimed that he was entitled to pay National Insurance contributions (NICs) at the full rate where his employment qualified as contracted-out employment to which reduced-rate contributions were applicable.

At the time of the case, “contracted-out” employment means employment where the employed earner was under pensionable age, his service qualified him for a guaranteed minimum pension under an occupational pension scheme; the scheme is contracted out in relation to that employment and a contracting-out certificate was issued by the Occupational Pensions Board.

The key aspect of this case was whether the employment was contracted out even though there was no valid contracting-out certificate for the entire time – there had been a valid contracting-out certificate at commencement of employment and after the taxpayer left employment.

The commissioner dismissed the taxpayer's appeal on the basis that the later contracting-out certificate could take effect from an earlier date than the date of issue. As the taxpayer was in contracted-out employment, it followed that he was liable to NICs at the reduced rate and was not entitled to pay contributions at the full rate.

This case should not have direct relevance for Ireland.

For further details, see page 38.

Gaines-Cooper v R & C Commrs

This UK Special Commissioners case deals with domicile. The concepts of residence and ordinary residence are also considered.

The taxpayer claimed to have abandoned his domicile of origin in the England and acquired a domicile of choice in the Seychelles in 1976 and that he retained that domicile of choice ever since.

The case outlines that a domicile of choice is acquired by a combination of residence and the intention of permanent or indefinite residence. Residence for the purposes of the law of domicile meant physical presence as an inhabitant but where a person resided in two countries it was necessary to look at all the facts. According to the special commissioners, the burden of proof was on the taxpayer to show that he had abandoned his domicile of origin.

Based on the facts of the case, the commissioners did not support the conclusion that the Seychelles was the taxpayer's chief residence. England remained the centre of gravity of his life, and his interests and chief residence was there. There was no evidence of an intention of permanent and indefinite residence in the Seychelles.

In this particular case, the concepts of residence and ordinary residence are based on the specific provisions for Commonwealth and Irish citizens, i.e. there is no definition, so the words are given their natural and ordinary meaning. It was held that the taxpayer had been resident and ordinary resident in the UK during the relevant tax years.

The case may have relevance for Ireland in the area of domicile. The concept of residence and ordinary residence are specific to the UK and hence should not have direct relevance for Ireland.

For further details, see page 39.

VAT and Duties Tribunal

Madgett t/a The Howdon Court Hotel

This UK appeal concerns VAT assessments under the Tour Operators Margin Scheme (TOMS) on the Appellants who operated a hotel in Torquay.

The case has been running since 1992. It started before a differently constituted Tribunal which decided that the Appellants were not tour operators. On appeal by the commissioners, the High Court referred the question whether the Appellants were tour operators to the ECJ. While the ECJ ruled that the Appellants were tour operators, the ruling by the ECJ did not resolve the dispute.

On return to the Tribunal, the following matters were still in dispute:

1. Were Customs entitled to require the Appellant to use a cost-based apportionment in the present case?
2. Is the market-value basis limited to the deduction of the market value of similar in-house supplies from total package supplies so as to determine both the bought-in and the in-house elements?
3. Was the TOMS Leaflet ultra vires the 1987 Order and the Act? If so what are the consequences?
4. If the Appellant could be required to use the cost basis of apportionment, are the in-house costs under TOMS limited to supplies for the direct benefit of the customer as with bought-in supplies?
5. What is the correct quantum on the TOMS leaflet cost basis?
6. Were the original assessments in January 1992 made to best judgement?

The Tribunal allowed the taxpayer's appeal. The following is a summary of the conclusions:

• On the basis of the interpretation by the ECJ of Article 26 of the Sixth Directive, the United Kingdom was not entitled to require tour operators to apportion package prices between in-house and bought-in supplies on a costs basis. A costs basis may only be required or used where the market value of in-house supplies is not possible and where a cost apportionment accurately reflects the structure of the package.
• In requiring a cost apportionment under the Leaflet the Commissioners did not comply with the Directive and acted outside their powers under domestic law.
• There was no challenge to the validity of the returns by the Appellants based on market value apportionments other than on the grounds that the returns should have been based on a cost apportionment. Since the requirement for a cost apportionment was invalid, the returns were correct and the appeal succeeds.
• In any event, even if the Commissioners had been entitled to require a cost apportionment, the assessments would have been substantially reduced on a correct application of the TOMS Leaflet.

Ireland does not operate a Tour Operators Margin Scheme. However, the general implications of apportionment methods might be considered useful.

For further details, see page 42.