European Court of Justice

Test Claimants in the Thin Capitalisation Group Litigation v IR Commrs (Case C-524/04)

This case was discussed in Section 1.39 of the April 2007 edition of tax.point.

For further information, see page 26.

Reemtsma Cigarettenfabriken GmbH' v Ministero delle Finanze (Case C-35/05)

VAT – charged in error

In this ECJ case, a company whose principal place of business was in Germany (with no permanent establishment in Italy) received advertising and marketing services from an Italian firm. The Italian firm charged VAT in error and paid it to the Italian tax authorities.

The German company sought reimbursement of the VAT paid, which was refused by the Italian tax authority. The ECJ ruled that VAT, which was not due and had been invoiced in error and paid to the tax authorities where the services had been supplied, was not refundable.

The key issue in this case was that the tax had been charged in error and hence there is no provision to allow refund of such tax – if the VAT had been charged correctly, then provisions are in place to allow a refund.

For further information, see page 27.

UK High Court (Chancery Division)

R & C Commrs v Royal Society for the Prevention of Cruelty to Animals; R & C Commrs v Totel Ltd [2007] EWHC 422 (Ch)

VAT – interest on repayments

In the RSPCA and Totel cases, the taxpayers had received repayment of VAT which had been initially disallowed, together with a repayment supplement. The taxpayers appealed to the Tribunal on the grounds that interest should be paid in addition to the repayment supplement. The tribunal held that, without appeal to the tribunal, a taxpayer who was due a repayment which was delayed was entitled to interest in ‘certain cases of official error’ and repayment supplement if he received a ‘delayed payment or refund’.

Customs appealed both decisions. The key questions were

• whether the tribunal properly exercised its discretion to determine interest;
• whether account should be taken of the interest payable where there was no appeal; and whether account should be taken of the repayment supplement for late payment by Customs.

It was held that the VAT tribunal was entitled, but not bound, to take account of repayment supplement paid in the event of late payment by Customs when exercising its discretion to determine interest.

For further information, see page 29.

R & C Commrs v Smith [2007] EWHC 488 (Ch)

CIS – did the turnover test affect the taxpayer's human rights

In this case, the Revenue had appealed the Special Commissioner's decision that a taxpayer's human rights had been violated by the construction industry scheme (CIS) turnover test, which he failed because of ill-health and hence could not a sub-contractor certificate.

The High Court held the turnover test as implemented with a single threshold of £30,000, was within the margin of appreciation which was allowed under the European Convention on Human Rights. Also, a system which adjusted the threshold for part- time workers would be very complex, and there was no disproportionality in the failure to adopt a complex solution. Hence, the High Court held that the commissioners had erred in their conclusion.

For further information, see page 31.

Johnston Publishing (North) Ltd v R & C Commrs [2007] EWHC 512 (Ch)

Intra-group transfers – associated companies

This case revolves around the construction of legislation.

Shares were transferred from one group company to another – at this stage the transferor company and transferee company were not associated. A chargeable gain did not arise at this time as it was an intergroup transaction. The company that had received the shares left the group. At the time of leaving the group, it was associated with the company that it had received the shares from. For clarity's sake it is important to note that the company that it was associated with was also it subsidiary at the time of leaving the group.

The taxpayer argued that no chargeable gain arose on leaving the group because it was associated with the transferor company at that time. The Revenue argued that the two companies must have been associated at the time of the transfer AND on leaving the group.

The key issue in the decision is the interpretation of the section 179 (2) TCGA 1992, and in particular the need for the second reference to “associated” –

“ Where 2 or more associated companies cease to be members of the group at the same time, subsection (1) above shall not have effect as respects an acquisition by one from another of those associated companies.”

It was decided by the Court to uphold a decision of the Special Commissioners that it was necessary that associated companies should have been associated not only at the time of leaving the group but also at the time of the previous intra-group transfer. This seems an exceptionally strict interpretation and it is likely that the decision will be appealed. If the decision holds then while bad news for the taxpayer in this particular case, such construction could work to the tax planner's advantage in other cases.

The corresponding Irish legislative provision, section 623 (3) TCA 1997, has almost identical wording so this case should have relevance for Ireland as well. Also, as this case revolves around the construction of legislation, it could have more wide-ranging relevance than just inter-group transfers.

For further information, see page 32.

Ford Motor Co. Ltd v R & C Commrs

VAT – promotional offer

In this case, the finance company in the group offered special deals to purchasers of certain models of motor vehicles through the network of dealers.

Two such promotional offers related to “free” motor insurance and “free” breakdown insurance. The taxpayer contended that it was only required to account for VAT on that part of the price of the cars that was not referable to the free car insurance and breakdown cover. Customs were of the view that there was only a single standard rated supply for VAT purposes.

It was held that there was only a single standard-rated supply for VAT purposes. The key issue in the decision was the fact that customers were told that the benefits of insurance and breakdown cover were provided free to them – the price paid for the cars never changed and the sales invoice indicated the full price of the car only.

For further information, see page 33.

Newcastle United plc v R & C Commrs [2007]

EWHC 612 (Ch)

VAT – deductibility of footballers’ agents’ fees

Those of you with an interest in football (or indeed VAT!) will probably recall coming across this case before – you're correct: the Case Commentary in the February 2007 edition of tax.point considered the decision at the VAT and Duties Tribunal where the tribunal dismissed the Club's appeal on the deductibility of VAT paid by Newcastle United on players’ agents’ fees.

The High Court has remitted the case back to the tribunal. It was noted that the tribunal had relied on several propositions or bases that were not correct, including making a fundamental mistake about exclusivity – it misunderstood the express exclusivity provisions and assumed that there was a contractual obligation that the agent would not act for another. Hence the decision was flawed.

The court did not go on to decide the case in light of the findings of the tribunal as neither the findings of the tribunal nor the material before the court enabled the court to make a decision. The case was remitted back to the tribunal for further consideration of the relevant points.

For further information, see page 33.

Spearmint Rhino Ventures (UK) Ltd v R & C Commrs [2007] EWHC 613 (Ch)

VAT – self employed table dancers

In this case, it was held that the taxpayer who operated six clubs providing table-dancing services to the public, where the services were provided by self-employed table dancers, did not make a supply of entertainment services.

The key issue was whether the dancer supplied her services to the customer, or to the taxpayer who in turn provided entertainment services to the customer.

According to the judgement, the evidence clearly demonstrated that the dancer chose her own customers and could negotiate a fee which departed from the standard fee, which she kept. In conclusion, there was no evidence of an agency arrangement between the taxpayers and the dancer.

For further information, see page 35.

Kalron Foods Ltd v R & C Commrs [2007] EWHC 695 (Ch)

VAT – supply of “smoothies”

The taxpayer operated retail outlets selling various bends of fresh raw fruits and vegetables sold in takeaway cups. Customs classified the product as a beverage subject to VAT at the standard rate, while the taxpayer argued that the product was not a beverage but more suited to eating.

The Court held that the Tribunal was entitled to conclude that the product was a beverage.

The Irish Finance Act 2007 puts beyond doubt the application of the above decision in Ireland by providing that the supply of drinkable products made from fruit or vegetables is taxable at 21%.

For further information, see page 36.

R & C Commrs v Gracechurch Management Services Ltd [2007] EWHC 755 (Ch)

VAT – deduction of input tax on construction work

In this case, the taxpayer and another company were members of a group for VAT purposes. The taxpayer agreed to undertake the development of leased premises of the other company. The taxpayer received advance payment for the development. Prior to the commencing the development the taxpayer left the group. It completed the development three years later and invoiced the other company for the balance of the amount due, plus VAT. The taxpayer had incurred total input VAT of £4,944,814. The taxpayer tried to claim the input credit in its entirety, however Customs disallowed £3,193,652.

The Tribunal had ruled in favour of the taxpayer, but the High Court overruled that decision. The key issue in the High Court decision related to the supply in respect of the £20m while both companies were part of a group, i.e. where supplies were to be disregarded then they were non-supplies. The decision in this case followed the decision in the C & E Commrs v Apple and Pear Development Council [1986] BTC 5,024.

Therefore, the input tax had to be apportioned and only that part attributable to a taxable transaction was deductible.

For further information, see page 37.

UK High Court (Administrative Court)

R (on the application of Just Fabulous (UK) Ltd) v R & C Commrs; R (on the application of Evolution Export Trading Ltd and Greystone Export Trading Ltd) v R & C Commrs; R (on the application of Brayfal Ltd) v R & C Commrs [2007] EWHC 51 (Admin)

VAT – delay in issuing refund

This case has arisen as a result of recent spate of MTIC (missing trader intra-community) or ‘carousel’ fraud.

Customs had failed to pay very substantial sums claimed in the VAT returns of three taxpayers (£19.5m; £30.3m and £914,000 respectively), although they had not yet made a decision not to pay, as they asserted that they were still investigating what they had concluded to be sufficiently suspicious circumstances. The taxpayers sought a judicial review of the refusal of their claim for repayment.

The High Court held that, in respect of an assumed deliberate dishonest transaction, Customs could lawfully decide to withhold repayment of VAT pending the outcome of an enquiry into their VAT returns. The key issue was that Customs had to show that the transactions were what they claimed to be, they had an arguable case that the taxpayer who knowingly engaged in the conduct designed to conceal a fraud should be in no better position than the perpetrator of the fraud. If the taxpayers were right in their assertion then Customs would be powerless to prevent massive fraudulent claims.

For further information, see page 38.

R (on the application of Bamber) v R & C Commrs [2007] EWHC 798 (Admin)

Flat rate expense allowance

The Revenue had agreed a flat rate allowance with an airline in relation to pilots and cabin staff in June 2004. However, in November Revenue informed the airline that it could not stand by the agreement as it was so out of line with Revenue policy and practice.

One of the pilots applied to quash the Revenue letter. In the course of the High Court hearing (initially heard in 2006) the taxpayer claimed that he was claiming a money sum to compensate him for the detriment he had suffered. This High Court case is to determine if the court had jurisdiction to award damages where the taxpayer was no longer seeking a quashing order.

The High Court held that the court had no jurisdiction to award a money sum in judicial proceedings challenging a decision of Revenue and Customs to resile from an agreement relating to flat rate expense.

For further information, see page 39.

Special Commissioners

Re an application by R & C Commrs to serve a s.20 notice on Financial Institution No.2 in respect of customers with UK addresses holding non-UK accounts

Investigation into offshore accounts

These cases relate to the UK special investigation into offshore accounts, which was included in Section 1.17 of the May edition of tax.point.

The Revenue applied separately to the Special Commissioners for consent under legislative provisions in the Taxes Management Act 1970 to serve notices on Financial Institution No.2, (Financial Institution No.1 was dealt with in the May edition of tax.point) seeking documents about customers with UK addresses and non-UK bank accounts. Section 20 of TMA 1970 provides for the issuing of a notice requiring the disclosure of documents without naming the taxpayers concerned.

The Special Commissioners granted the Revenue's application for consent to issue a notice. The inspector was justified in proceeding as the information that the Revenue had already obtained raised serious questions that merited investigation and it could not be investigated by any other means.

For further information, see pages 40.

Training Consultant v R & C Commrs

Double tax relief – partnerships

This case relates to a taxpayer, a chartered accountant, who carried on a business of accountancy training consultancy in Slovakia. Initially he operated as a sole trader before setting up a joint venture with a company operating in Slovakia. In 2000 the taxpayer agreed to merge his business with a third party into a newly formed company.

The key question in this case was whether the taxpayer was entitled to double taxation relief for Slovak tax charged on the Slovak operation. The key issue was the legal nature of the Slovak operation. The taxpayer contended that it was akin to an English partnership, in which case he was entitled to credit relief for the Slovakian tax. The Revenue contended that the taxpayer's joint venture party carried on the whole of the business but contractually paid the taxpayer 50% of the adjusted profits, with the result that the taxpayer was not entitled to credit relief for the Slovakian tax.

The Special Commissioner decided that the Revenue's contention was right, i.e. the operation was akin to a silent partnership, and that the taxpayer was not entitled to claim double tax relief in respect of the Slovak income. The key argument in the decision was the Slovak operation appeared to third parties to be the joint venture party's business and the taxpayer's input was that of being consulted rather than having an equal say in how the operation was run. Also, while the taxpayer contended that the operation was akin to an English partnership, he stated that he did not contend that the operation amounted to a partnership under the Partnership Act 1890.

Ireland has a tax treaty with Slovakia. This case may prove useful in specifically dealing with operations in Slovakia or, in more general terms, in the determination of the legal nature of foreign operations.

For further information, see page 42.

Colley & Anor v R & C Commrs

Loss relief – capital losses

In this case, a partnership business (including goodwill) was transferred to a company. The Revenue issued assessments in respect of the capital gain on the transfer of the partnership goodwill to the company. The taxpayers maintained that the goodwill had been gifted to the company. However, the taxpayer lost his appeal to the Special Commissioners.

The taxpayers then responded by claiming that the capital gain from the goodwill could be offset by a capital loss from a loan to the company to acquire the goodwill. I know what you're thinking … didn't they gift the goodwill to the company? Yes, and that is why the taxpayers lost this appeal. In summary, the taxpayers case was implausible.

In Ireland, if a non-corporate business (including partnership) is transferred to a company, no capital gain should arise provided the whole of the business is transferred in exchange for shares in the company, and a bona fide commercial test is met.

For further information, see page 43.

Auntie's Cafè Ltd v R & C Commrs

Penalties for late filing

In this case, the taxpayer had been late filing four returns. It had incurred minor penalties for the first two returns and a fixed penalty of £1,000 for the third and fourth returns. The taxpayer had no taxable profits for the two periods in respect of which it was charged the penalties. The taxpayer conceded that the penalties had been properly charged and that it had no reasonable excuse for filing late. The taxpayer contended that the penalties were in breach of the European Convention on Human Rights (ECHR).

The Special Commissioner decided that the penalties did not infringe the taxpayer's human rights. In making his decision, the Commissioner stated that it was not enough merely to suggest that a fixed penalty impacts more adversely on a taxpayer with fewer assets than on one with more assets.

The decisive point in the present case between the Appellant's and HMRCs’ arguments is what has to be balanced in judging whether the deprivation of property survives the “proportionality” test. In the judgment, the Commissioner stated that HMRC had amply demonstrated that some form of modest fixed penalties are a sensible and required feature of the taxation system; the penalties are extremely modest; there are several safeguards to deal with postal delays, and reasonable excuse; and the penalties only rise from figures of £100 and £200 (which for companies one might describe as derisory) to still very modest figures of £500 and £1000 for companies which can fairly be described as “persistent offenders”.

For further information, see page 44.