European Court of Justice

JP Morgan Fleming Claverhouse Investment Trust plc & Anor v R & C Commrs (Case C-363/05)

VAT – Investment Trust Companies

This ECJ case deals with proceedings brought by the taxpayer against HMRC regarding their refusal to exempt the management services supplied to the taxpayer, an investment trust company, by a third party, from VAT.

Under the Sixth Directive, Member States are to exempt “management of special investment funds as defined by Member States” from VAT.

The VAT Tribunal referred the following questions to the ECJ for a preliminary ruling:

1. Are the words “special investment funds” in Article 13B(d)(6) of the Sixth Directive capable of including closed-ended investment funds?
2. If the answer to the first question is in the affirmative, does the phrase “as defined by Member States” in Article 13B(d)(6):

1. allow Member States to select certain of the “special investment funds” within their jurisdiction to benefit from the exemption of the supply of management services and exclude others from the exemption, or
2. does it mean that the Member States are to identify those funds within their jurisdiction which fall within the definition of “special investment funds” and that the benefit of exemption should extend to all such funds?

The ECJ ruled that:

1. Article 13B(d)(6) of Sixth Directive must be interpreted as meaning that the words ‘special investment funds’ in that provision are capable of including closed-ended investment funds, such as Investment Trust Companies.
2. (a)That provision allows Member States a discretion in defining the funds located on their territory which are covered by the notion of ‘special investment funds’ for the purposes of the exemption provided for by that provision.
   (b) However, in the exercise of that power, the Member States had to respect the objective of that provision, which is to facilitate investment in securities for investors through investment undertakings, while guaranteeing the principle of fiscal neutrality from the point of view of the levying of VAT on the management of special investment funds which are in competition with other special investment funds.
   Finally, art 13B(d)(6) had direct effect, in that it could be relied on by a taxable person before a national court in order to challenge the application of national legislation alleged to be incompatible with that provision.

See Section 1.22 of this issue of tax.point for HMRCs response to the above ruling.

For further information, see page 36.

Ministero delle Finanze-Ufficio IVA di Milano v CO.GE.P Srl (Case C-174/06)

VAT – letting of immovable property

Italy provided that the maritime authorities may grant use of territorial waters, and such transactions were not subject to VAT. The taxpayer, who had been granted the right to occupy and use exclusively State maritime property, was issued invoices without VAT being applied. The Tax Authority was of the view that such transactions were subject to VAT as they were a supply of services effected in the course of economic activity.

The ECJ ruled that a person who had been granted the right to occupy and use, including exclusively, public property, namely areas of State maritime property, for a specified period and against payment, was covered by the concept of ‘leasing or letting of immovable property’, which was exempt from VAT under art 13(B)(b).

The key issue in the decision was that the legal relationship was covered by the concept of “leasing or letting of immovable property”.

The fundamental characteristic of the relationship, which it had in common with the leasing or letting of immovable property, consisted in the provision of an area, i.e. part of the State maritime property, in return for payment, together with the grant to the other contracting party of the right to occupy it or use it and to exclude all other persons from the enjoyment of that right.

As a consequence, observance of the principle of the neutrality of VAT and the requirement that the provisions of the Sixth Directive be applied consistently, in particular, those relating to exemptions, entailed treating the relationship in this case in the same way as the leasing or letting of immovable property for the purpose of Article 13B(b) of Sixth Directive.

For further information, see page 37.

Court of Appeal (Civil Division)

Neil Martin Ltd v R & C Commrs [2007] EWCA Civ 1041

Duty of care - damages from HMRC

This is a highly unusual case where the taxpayer was suing the Revenue for damages under Common Law.

The claim in the proceedings was for damages for breach of duty in failing to process within a reasonable time the claimant's application for a certificate under the scheme established in respect of sub-contractors in the construction industry.

Firstly, it had to be decided if a duty of care was established in law, and then if the Commissioners were in breach of that duty in the circumstances alleged in the particulars of claim.

Mr Neil Martin operated as a sole trader. He transferred his business to a company. During that time (1999), the new Construction Industry Scheme commenced whereby payments could only be paid gross if the sub-contractor had a registration card/certificate.

On the facts found by the High Court judge, it can be seen that the earliest date upon which Mr Martin could be said to have made an effective application on behalf of the company for a CIS6 certificate was 16 June 1999: the date on which he returned to the tax office with completed, but unsigned, CIS3 and CIS8 forms. He did not receive the certificate until around 20 September 1999, some three months later.

That delay could be attributed to five distinct matters:

1. the refusal by the Revenue official (between 16 June and 20 July 1999) to accept that the company's application could be made on the basis of Mr Martin's sole trader accounts;
2. the failure of both the Revenue official and Mr Martin to notice or appreciate, on 20 July 1999, that the July forms had not been signed;
3. the decision by someone at the Furness office to complete (without authority) the July CIS3 form as an application for a CIS4 registration card (rather than as an application for a CIS6 certificate) leading to delay between 29 July 1999 and 9 August 1999 (the date on which the August forms were signed):
4. the insertion in the August CIS3 form of Mr Martin's UTR (rather than that of the company) leading to delay between 11 August and 7 September 1999 while that error was identified and corrected; and
5. the period of some ten days between the issue of the CIS6 certificate on 10 September 1999 and its receipt by Mr Martin, some part of which may be attributable to the decision by the Tax Office to post the certificate to the address of Mr Martin's parents.

It was held that a common law duty of care was owed to the taxpayer by the unidentified Revenue employee who chose to complete an application for a subcontractor's registration card without the subcontractor's authority, resulting in delay and leading to economic loss for the taxpayer. The reason for the ruling was that the unidentified Revenue employee went beyond an administrative mistake made in the ordinary course of processing the application under section-in completing the declaration in support of an application for a registration card, the employee took it upon himself to make an application on behalf of the claimant company: an application which the claimant company had chosen not to make, and which it had not made.

No common law duty of care was owed to the claimant company by either the unidentified employee at the Tax office who inserted the incorrect UTR on the August CIS3 form on or about 11 August 1999 or the unidentified employee at the Tax processing centre who posted the CIS6 certificate to the wrong address -those were plainly administrative mistakes made in the ordinary course of processing the application.

For further information, see page 38.

UK High Court (Chancery Division)

Premier Foods (Holdings) Ltd v R & C Commrs [2007]

VAT – fruit bars … confectionery?

This UK High Court case dealt with the question of whether a fruit bar was “confectionery” for VAT purposes. The fruit bar was marketed as “one fruit portion” and “ideal for lunchboxes”. If it was confectionery, then it would be excluded from the zero rate of VAT, i.e. subject to VAT at the standard rate.

The VAT tribunal had decided that a fruit bar was not “confectionery” as it was not cooked and was sweetened naturally. The Revenue appealed to the High Court.

The High Court remitted the case to a differently constituted VAT tribunal as it was held in the High Court that the original VAT tribunal had made an error of law by applying the wrong test. Based on the definition of those items that are to be treated as “confectionery”, it was not necessary that for a product to be “confectionery” it had to be subjected to a particular process. Also, there was no requirement for additional sweetener.

For further information, see page 40.

JP Commodities Ltd v R & C Commrs [2007] EWHC (Ch)

VAT – Intra-Community Supply

This case deals with the supply of electronic goods to a customer in Gibraltar, with a Belgian delivery address.

The customer was not registered for VAT in Belgium (but should have been, as it carried on business there). The taxpayer treated the supplies as zero-rated but Customs took the view that there was no entitlement to zero-rating as the customer's VAT number was not shown on the invoice.

The High Court found in favour of Customs (upholding the decision of VAT Tribunal), that the taxpayer was not entitled to apply the zero rate to the supply as it had not the VAT number of the customer. The key issue in the decision was that the whole purpose behind the zero-rating of Intra-Community supplies was that the customer must account for VAT on the goods in its Member State. Therefore, it was not enough that the customer was a taxable person – it also had to be registered for VAT, so that it was in a position to account for VAT in its Member State.

For further information, see page 40.

Hudson Contract Services Ltd v R & C Commrs [2007] EWHC 2561 (Ch)

Construction Industry – agency workers

The taxpayer provided employment services to contractors in the construction industry. It supplied workers to its clients for a fee and managed the clients’ payroll. The Revenue ruled that the taxpayer was required to treat the workers as employees and operate PAYE and pay National Insurance contributions.

The General Commissioners concluded that the taxpayer was not obliged to make those deductions. The Revenue repaid the primary NICs to the workers directly and the secondary NICs to the taxpayer. The taxpayer applied for repayment of the PAYE income tax deducted and NICs that it had paid in error. The Revenue refused to repay on the grounds that the taxpayer had no legal claim.

The High Court held that the taxpayer was not entitled to recover sums paid in error to the Revenue Commissioners. The key issue in the decision was that the workers were employed by the taxpayer's clients and the taxpayer had operated as a payroll agent on behalf of its principal.

For further information, see page 42.

Gaines-Cooper v R & C Commrs [2007] EWHC 2617 (Ch)

Domicile

See Section 1.24 for commentary on this case.

For further information, see page 43.

Special Commissioners

Stubbs & Anor v R & C Commrs

Transfer of pension to spouse

The point at issue in the appeal was whether the taxpayer, who was entitled to a pension from a former employer, could transfer one half thereof to his spouse for income tax purposes, and thereby enable her to take advantage of her personal allowance which was not fully utilised.

In making the decision it was noted that the taxpayer's membership of the pension scheme entitled him to a personal pension for life on retirement, and his spouse to a lesser widow's pension for life should he predecease her. A specific rule in the scheme provided that “Save as permitted by the Pensions Act [1995], benefits payable under the Rules and the entitlement or right thereto cannot be assigned, committed, surrendered or charged and no lien or set-off may be exercised in respect of them”.

This rule was amended to take account of a change n law which allowed divorced person to assign pension rights. The taxpayer and his spouse claimed that since pensions due to divorced people may be ordered (albeit by court order) to be paid partly to one party and partly to the other, equality and fairness demand that they be allowed to apportion the taxpayer's pension between them. The Special Commissioner advised that fairness and equality were not matters they could take into consideration in arriving at their decisions.

On this basis it was decided that as the taxpayer was the person both receiving and entitled to the pension he received, he was liable to income tax on the whole of it.

For further information, see page 44.