European Court of Justice

Investrand BVv Staatssecretaris (Case C-435/05)

VAT – input credit

The taxpayer company was a passive holding company which sold shares in a clothing company. As part of the sale, the taxpayer received a fix sum and a further sum which would depend on the profits of the clothing company over a three year period. After the sale, the taxpayer carried out management activities for the clothing company. A dispute arose over the calculation of the sum payable which gave rise to legal advisory services.

The issue in this case relates to the availability of input credit to the taxpayer on the legal expenses. The ECJ ruled that taxpayer was not entitled to input credit.

The decision was based on whether there was a direct and immediate link between the cost of the advisory services with the arbitration proceedings arising from the sale of the shares, or future taxable transactions.

• The sale of shares did not constitute an economic activity within the meaning of the Sixth Directive.
• In addition, the costs did not relate to management activities of the taxpayer.

Hence, input credit on the advisory services was not available to the taxpayer.

For further details, see page 26.

Court of Appeal (Civil Division)

Marks & Spencer plc v Halsey (HMIT) [2007] EWCACiv117

Group losses – ECJ decision

This is the appeal following the return of the well-known Marks & Spencer ECJ decision to its native land.

The High Court had referred the question to the ECJ of whether the UK group loss provisions, which restricted the availability of group relieving losses to losses of a UK resident company, were contrary to Community Law. You will recall from Section 1.07 of the January 2006 edition oftax.point that the ECJ ruled that it was contrary to Community Law to prevent the use of losses of a non-resident subsidiary where the non-resident subsidiary has exhausted the possibilities available in its State of residence.

On return to the High Court, the judge directed that the UK company was not entitled to group relief for the losses of the French subsidiary. As regards the losses of its Belgian and German subsidiaries, the matter was remitted to the Special Commissioners to make further findings of fact and determine the appeals in light of those facts. The Revenue appealed this and the taxpayer cross-appealed also, i.e. whether the High Court judge erred in his interpretation of the conditions laid down by the ECJ.

The Court of Appeal dismissed the Revenue' appeal and allowed the taxpayer's cross-appeal in part. The following points should be noted:

• It was clear that the UK tax authorities were entitled to reject a claim for group relief where the surrendering company was not resident in the UK, unless the taxpayer company demonstrated to the UK tax authorities that the conditions laid down by the ECJ were fulfilled.
• There was no reason why the Revenue should not require at the time the claim is made a notice from the non-resident surrendering company which confirmed that it had exhausted the possibilities for the losses.
• There was no support in the reasoning that the conditions laid down by the ECJ had to be satisfied at the end of the surrendering period rather than when the group relief was made.

The Irish Finance Act 2007 brought in legislative changes to take account of the above ECJ decision.

For further details, see page 28.

UBSAG vR&C Commrs [2007] EWCA Civ 119

Tax credit – distributions – Swiss Company with UK branch

This case relates to the difference in treatment of distributions between a company resident in the UK and a company resident in Switzerland, with a UK branch.

This case looks at possible discriminatory treatment where both countries are not EU Member States, but a tax treaty with a non-discrimination article exists. It could be considered similar to those ECJ cases claiming incompatibility with the Treaty of Rome, but with a twist.

The Swiss company had carried on business in London through a branch. It had received dividends from UK resident companies and received and paid ‘manufactured dividends’. There was a surplus of UK dividends (and ‘manufactured dividends’) received and had the taxpayer been a UK resident company the distributions would have carried tax credits.

The key issue was whether tax was ‘less favourably levied’ on the taxpayer within the meaning of Art. 23 of the UK-Switzerland Double Taxation Convention (the non-discrimination article), i.e. whether the refusal of tax credit was discriminatory under the Convention.

The Court of Appeal held that the refusal of tax credits was not discriminatory under the Convention. The basis for the decision related to the legislative provisions in the UK Tax Law which give effect to the Convention (s.788 ICTA 1988)-the taxpayer was not entitled to invoke art. 23, because it was not seeking relief, as it had no tax liability which would otherwise be payable.

This case is a worthwhile read for anyone with an interest in the workings of tax treaties.

For further details, see page 30.

Mayflower Theatre Trust Ltd v R &' C Commrs [2007] EWCA Civ 116

VAT – taxpayer charity

The taxpayer was a registered charity with the principal aim of encouraging the arts. It carried on business from a theatre and paid production companies to put on performances in the theatre. Following the judgement in the C & E Commrs v Zoological Society of London, the ticket sales were treated as exempt from VAT.

The taxpayer sought partial recovery of input credit, as the taxpayer contended that the input tax on amounts paid to the production companies was attributable to both taxable and exempt supplies. Customs argued that the input tax was wholly attributed to the exempt sale of tickets.

It was held at the Court of Appeal that the taxpayer was entitled to partial recovery of the input credits. The key issue in the judgement was theBLP test from BLP Group plc v C & E Commrs (Case C-4/94), i.e. there was a direct and immediate link between the payments made by the taxpayer charity to production companies for putting on performances in its theatre and the provision by the taxpayer of programmes for sale to those attending the performances which was sufficient to bring those payments within the partial exemption provisions

For further details, see page 31.

High Court (Chancery Division)

R &' C Commrs v EB Central Services Ltd & Anor [2007] EWHC 201 (Ch)

VAT – Supply of storage facilities

The taxpayers provided storage facilities for the personal luggage of passengers at a number of UK airports. It had accounted for VAT at the standard rate on those services, until it was claimed that the charges should have been zero-rated. The taxpayers sought substantial refunds of VAT overpaid.

The key issue related to whether the services fell to be treated as ‘goods to be carried in a ship or aircraft’ or ‘goods’ imported from or exported to a place outside the EU, both of which were derogations from the Sixth Directive.

The High Court concluded that 95% of the goods, in respect of which the taxpayers had provided storage facilities, had been or were to be carried on an aircraft and hence fell under the first derogation. In addition, the decision was made on the basis that the Sixth Directive could not be used to interpret a derogation from that directive.

It was held accordingly that the supply of storage facilities was a zero-rated supply of services.

For further details, see page 33.

R&C Commrs v Isle of Wight Council [2007] EWHC 219 (Ch)

VAT-Off-street parking

The taxpayers were four local authorities which provided off-street car-parking facilities. Art 4(5) of the Sixth Directive exempted certain public authorities from the status of taxable persons in respect of certain activities provided it does not lead to significant distortions of competition.

As the consequences of the case were sufficiently far-reaching and Community guidance thus far was insufficiently clear, this case has been referred for a preliminary hearing to the ECJ, as follows:

• on the question of whether art. 4(5) intended any ‘real world’ investigation;
• the true meaning of ‘would lead to’, and
• the proper interpretation of ‘significant distortions of competition’.

For further details, see page 34.

SCA Packaging Ltd vR &C Commrs [2007] EWHC 270 (Ch)

PAYE and NIC – Redundancy payments

In this case, the taxpayer made a number of employees redundant at various times between 1996 and 2001. The taxpayer agreed payment in lieu of notice as part of the redundancy package. The taxpayer did not deduct PAYE or National Insurance contributions (NIC) on the payments in lieu of notice on the basis that they were redundancy payments and not emoluments. The Revenue issues notices of determination on income tax due on the relevant payments.

It was held by the High Court that the sums paid in lieu of notice were emoluments from the relevant employees' employments so that the employer should have deducted and accounted for PAYE and NIC.

The key issue in the decision was that the employees were entitled to notice and they were entitled under their contracts to specified payments in lieu of notice whether payment in lieu of notice was agreed by the employees or not. Hence the payments were made under and pursuant to their contracts of employment and so constituted emoluments from the employees' employment.

On the basis that similar legislation exists in Ireland, this judgement may be useful.

For further details, see page 35.

R &' C Commrs v Dunwood Travel Ltd [2007] EWHC319 (Ch)

VAT-Tour Operators' Margin Scheme (TOMS)

The taxpayer carried on business as a tour operator. The taxpayer had wrongly treated coach travel as zero-rated for VAT purposes. Customs issued an assessment for the additional amount of VAT due. The taxpayer appealed on the grounds that the assessment was outside the three year time limit and so was invalid.

The High Court held that Customs had correctly made a separate assessment to VAT under the TOMS.

The key issue surrounded whether the three year time limit applied to VAT periods affected by the assessment (which was over three years), or to the annual adjustment for the VAT periods affected (which was within the three year period). It was decided that the year end calculation was the one which generated the correct VAT figure and hence the three year period should apply from that date. This is a surprising result and I think it is very likely that the taxpayer will appeal the decision.

For further details, see page 37.

R &' C Commrs v Mobilx Ltd

VAT – right to appeal

This case relates to the right of a taxpayer to appeal to a tribunal.

The taxpayer had submitted its VAT returns for two periods seeking repayment of £1.8m and £3.13m. Prior to issuing the refund Customs began an investigation into whether the repayments should be made. The taxpayer issued a notice of appeal in respect of the delay in issuing the refund.

The High Court held that the right to appeal to a tribunal with respect to the amount of any input tax could only apply where Customs had made a decision to refuse payment of input tax.

The key point in this case was that Customs had not made a decision and hence the taxpayer could not issue a notice of appeal.

For further details, see page 38.

Scottish Court of Session

Royal Bank of Scotland Group plc v R &' C Commrs [2007]CSIH15

VAT – recovery method for residual input tax

This case refers to a special method of calculation of recoverable input tax, and in particular whether the taxpayer was entitled to round up the deductible proportions of VAT calculated for each sector of its business; and whether in rounding up to a figure not exceeding the next unit, the taxpayer was entitled to round up to the next whole number.

The above questions depended on the interpretation of the sixth directive and it was decided to refer the case to the ECJ.

For further details, see page 39.

Special Commissioners

Kennerley v R &' C Commrs

Tax Administration – Revenue Power to amend assessment

In this case, the taxpayer had submitted three returns based on incomplete records (year ended 5 April 1999, 2000 and 2001); a fourth return was submitted later (year ended 5 April 2002). Revenue opened enquiries into the four returns as a result of an enquiry into the taxpayer's VAT affairs which revealed poor record keeping and understated turnover.

The taxpayer then submitted a later return (2002–03) before the actual return date. The inspector, having previously written to the taxpayer enclosing schedules of proposed adjustments for each of the years up to the latest return subject to receipt of working papers, issued an amended assessment for the latest year of assessment (2002–03). The Revenue had not made an enquiry into that year. On this basis, legislation provides that the only way the Revenue would be permitted to issue an amended assessment is if the taxpayer had been negligent.

The Special Commissioner decided that the taxpayer had been negligent and hence the Revenue were entitled to issue an amended assessment. The decision had been based on the understatement of the income in the return for 2002–03 by almost £18,000, which the Commissioner had concluded resulted in the taxpayer not taking precautions that a reasonable person would have done.

A similar restriction on the making of an amended assessment does not apply in Ireland – Section 955 TCA 1997 provides more wide-ranging powers to the Irish Revenue, so the decision does not have direct application. However, the discussion on the negligence of the taxpayer may prove useful.

For further details, see page 40.

Dispit Ltd v R & C Commrs

Deductibility of expense – provision rather than payment

The taxpayer operated a tipping site. Under its legal obligations entered into with the council, the taxpayer had to restore the surface of the filled site to a permanent high standard sometime in the future.

A specific UK legislative provision provided that where a person made a site restoration payment in the course of carrying on a trade, that payment should be allowed in computing the profits of the trade in the period in which the payment is made.

The Special Commissioner decided that a deduction was not allowed for the cost of reinstating the tipping site under the specific legislative provision. The basis for the decision was that the cost was included by way of provision rather than by way of payment.

As always in these decisions, the key issue was the meaning of ‘payment’. I think that in this particular decision, this is further complicated by the requirement to allow the deduction for the period of accounts in which the payment is made. Hence the provision for future expenditure would not be included.

Irish legislation does not have a similar provision. However, the discussion on the meaning of ‘payment’ is worthwhile considering.

For further details, see page 41.

Re an application by R &' C Commrs to serve a s.20 notice on Financial Institutions No. 1 in respect of customers with UK addresses holding non-UK accounts

Revenue Powers – Offshore bank accounts

A financial institution operated in a number of overseas jurisdictions. It held information on its computers in the UK relating to a number of individuals with UK addresses and with bank accounts in overseas jurisdictions. The Revenue were investigating the use of offshore accounts by UK residents.

The Revenue applied for consent to serve notice on the financial institution in relation to documents (including names and addresses) about customers with UK addresses who held non-UK bank accounts.

On the basis of the information already held by Revenue which raised serious questions that merited investigation, consent was given by the Commissioners to the issue of the notice.

The UK Revenue are slightly behind the Irish Revenue in terms of investigations into offshore bank accounts.

For further details, see page 42.

VAT and Duties Tribunals

Morpheus 2002 Ltd

In this VAT Tribunal, the taxpayer took over a company involved in managing the provision of legal work on re-mortgages for lenders such as Abbey National, National Westminster and buildings societies. The taxpayer sought confirmation on the VAT treatment of those services. The Commissioners confirmed that the services were standard-rated.

The taxpayer challenged the Commissioners' ruling stating that the two of the services provided (negotiation services and fee payment management) were exempt financial services, and that the other services were ancillary to those and thus also qualified for exemption.

The tribunal dismissed the company's appeal. Based on the ECJ decision in Card Protection Plan v C & E Commrs (Case C-349/96), the services provided by the company for the lenders constituted a single composite supply of management, administration, auditing and IT services, which bore no relation to the exempt financial services mentioned in Art 13(B)(d)(3) of the Sixth Directive.

Hence the tribunal decided that the company made single composite supplies which were standard-rated.

For further details, see page 43.