European Court of Justice

Walderdorff v Finanzamt Waldviertel (Case C-451/06)

VAT

The taxpayer managed an agricultural and forestry holding in Austria. The transactions which she carried out in the course of her business are subject to the general provisions of the VAT system.

The taxpayer entered into a contract with an angling club for a period of 10 years. Under this contract the angling club had the right, on payment of a consideration, to fish, first, in two ponds located within the taxpayer's holding, where she had the fishing rights in her capacity as the land owner, and secondly, in publicly owned fishing waters where the taxpayer had fishing rights registered in the Fisheries register. The taxpayer retained the right to fish in those waters herself and for up to one guest each day to fish there also. The taxpayer did not pay VAT in respect of those lettings. The tenants were not invoiced for VAT either.

The tax authority determined that those lettings should be subject to VAT at the normal rate, since the right to fish was a right which was independent of the land.

The following question was referred to the ECJ for a preliminary ruling:

‘Is Article 13B(b) of the Sixth Directive... to be interpreted as meaning that the grant of the right to fish, for consideration, in the form of a letting for a period of 10 years

1. by the owner of the property on which the body of water in respect of which the right was granted is located,
2. by the holder of fishing rights in respect of a body of water located on public land, constitutes “the leasing or letting of immovable property”?’

The ECJ decided that the grant for consideration, under a contract of let for a period of 10 years, of the right to fish, by the landowner in waters owned by that person, and by the holder of fishing rights in publicly owned waters, did not constitute either a leasing or a letting of immovable property. The key issue was that, while it was possible for an area under water to be treated as immovable property, in this case the grant did not confer the right to occupy the immovable property concerned and to exclude any other person from it (which was the meaning assigned to ‘leasing’ and ‘letting of immovable property’ in accordance with case law).

For further information, see page 26.

Court of Appeal (Civil Division)

Able (UK) Ltd v R & C Commrs [2007] EWCA Civ 1207

Capital vs income receipt

The taxpayer used its land as a landfill tipping site. Following service of a Compulsory Purchase Order in respect of part of the site, the taxpayer was kept out of possession of that part for just over three years. The taxpayer was paid compensation in the sum of £2,185,000 following its claim under the Land Compensation Act 1961. It took the view that that sum was capital.

The Court of Appeal upheld the decision of the High Court that the sum was to be treated as income rather than capital for tax purposes.

The key issue in the decision was that as a result of the temporary loss of use of a capital asset, compensation was paid to replace the loss of profit which would otherwise have been earned. According to case law, it was only where compensation was paid for the destruction or exhaustion of a source of profit that it was capable of constituting capital and not income. In this case, the taxpayer did not identify any source of income, derived from the landfill site, which was exhausted or realised. The capacity of the landfill site had been temporarily disrupted but not exhausted. The fact that the site could not be used for certain disposals was as a result of change in market conditions.

It was acknowledged that the question whether receipts or expenditure are of a capital or income nature was, once the facts are found, a question of law. In addition, it was a question which must be answered in light of all the circumstances which it was reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on a strict application of any single legal principle.

For further information, see page 27.

UK High Court (Chancery Division)

R & C Commrs v Trustees of the Peter Clay Discretionary Trust [2007] EWHC 2661 (Ch)

Tax treatment of trustees’ expenses

Additional income tax was payable upon certain income arising to trustees of discretionary trusts but statutory provision was made such that in computing the amount of the income such of the expenses of the trustees as were properly chargeable to income may be deducted.

The Peter Clay Discretionary Trust was a discretionary trust under which almost all of the income was customarily accumulated. There were two “nonexecutive” Trustees in respect of whom only limited fees were claimed for time spent by them preparing for and attending Trustees’ meetings.

In the relevant year, the Trustees incurred the following relevant expenses or outlays: Executive trustees fees; Non-executive trustees fees; Investment managers’ fees; Bank charges; Custodian fees; Professional fees.

The treatment of the trustees’ remuneration was the main expense at issue in the High Court.

“Expenses of the trustees” which can be attributable to income under the relevant legislation may reduce the amount of income chargeable at the higher rate. The phrase used in the relevant legislation was not the “expense of the trustees” nor was it “the expenses of the trust fund” but, rather, “the expenses of the trustees”. According to the judgement, it would be proper to distinguish between the expenses of the Trustees in the sense, for example, of their outlay in travelling to meetings between themselves, travelling to meet investment advisers, bankers or solicitors and so on, on the one hand, and remuneration for their service or services on the other.

Within the general law of trusts, trustees’ expenditure incurred for the benefit of the whole estate had to be regarded as a capital expense. In the High Court, the judge opined that the starting point should be that trustees’ remuneration should be regarded as incurred for the benefit of the whole estate. Hence there was a heavy evidential burden upon those who asserted some other conclusion. It was concluded that such evidential burden was not satisfied in this case.

For further information, see page 27.

R & C Commrd v Denyer [2007] EWHC 2750 (Ch)

VAT – rental of hairdressers’ chair

The taxpayer decided to invite other hair stylists to trade as self-employed hairdressers from his salon, supplying their services direct to customers, on the basis that they would “rent chairs” in his salon. The case concerned the correct VAT treatment of the supply by the taxpayer of a service or services to self-employed hair stylists at his salon.

It was held that hairdressers’ chair rental arrangements were supplies of hairdressers’ facilities rather than the letting of immovable property and so the Tribunal had erred in law in its decision.

The key issue in the decision was that it was apparent that stylists who had rented the “chair” at the salon could not conduct substantially the whole of their business within their allocated areas.

For further information, see page 30.

Wes tone Wholesale Ltd v R & C Commrj [2007] EWHC 2676 (Ch)

VAT – onward sale to Spain

The taxpayer carried on business as a wholesaler of confectionery, tobacco and soft drinks. It purchased goods in the course of its business from a trader in Glasgow with a view to their onward sale and despatch to a customer in Spain. With the exception of one consignment of razor blades the goods were never handled or received by the taxpayer but were delivered directly to a transport company for shipment to Spain.

During investigations in 2004 by officers of HMRC evidence was obtained to the effect that the movement records for the goods alleged to have been delivered to the customer in Spain had not been issued and none of the consignments had been delivered to Spain by the distribution company.

The Commissioners rejected the taxpayer's claim to zero-rate the supplies to the Spanish customer and they issued assessments to that effect. The taxpayer lodged an appeal against these assessments on the grounds that the goods were sold to the Spanish customer as claimed and that the documents evidencing their despatch were verified by customs officers. On further evidence the Commissioners concluded that the transactions were fraudulent and issued further assessments. The taxpayer appealed against the alternative assessments on the grounds that the assessments were unlawful. This case deals with the alternative assessments.

The High Court found in favour of the Revenue that the alternative assessments were not unlawful. In particular, the principles of certainty and proportionality, required by the Sixth Directive, were not infringed by UK law.

For further information, see page 31.

Special Commissioners

Barrett v R & C Commrd

Residence and ordinarily resident

There were two issues in this case:

1. Whether the taxpayer was resident and/or ordinarily resident in the UK in the tax year; and
2. To which year or years emoluments of £2.8 million received by the taxpayer should be attributed and, if to more than one year, how the emoluments should be apportioned between those tax years?

The Appellant was born in Canada in 1957 but was a ‘British Subject’ and so a Commonwealth Citizen. He was resident and ordinarily in the UK for many years before 1998-1999.

It had not been shown that the taxpayer had not been in the UK on 6 April 1998 and hence it was presumed that he was. Therefore, the Special Commissioner concluded that he could not have been non-resident for the relevant tax year. It was decided that the payment was made when the taxpayer was resident in the UK.

The key issue in this decision was the lack of objective evidence that there had been a distinct break. Indeed the Special Commissioner expressed surprise that there was lack of certainty as to when the taxpayer went abroad. In addition, the taxpayer had shown none of the attributes that one would expect of a non-resident or of a person where there had been a distinct break.

For further information, see page 32.

Crusader v R & C Commrs

Donation as part of consideration on sale of shares

This appeal concerned the sale of a company called G Limited to a company called S Limited which was in turn owned by C Limited in October 1999. The consideration was expected to be £3.7m.

Prior to the transaction, the taxpayer, his spouse and another individual owned between them the entire issued share capital (consisting of 100,000 ordinary shares) of G Limited.

On 13 October 1999 the G Limited shareholders disposed of their shares in G Limited to S Limited in return for an issue of S Limited shares (worth £1.585m), cash (of £415,000) and loan notes (worth £1,500,000). The total value of the transaction was £3.5m.

At about the same time, C Limited made a payment of £200,000 to the Fellowship, a recognised charity and a church of which the taxpayer was a member. C Limited claimed Gift Aid relief on this payment and its claim was accepted by the Revenue after enquiry.

The issue was whether the donation of £200,000 should be treated as further consideration for the taxpayer's G Limited shares.

The Special Commissioner decided that the donation was part of the overall commercial consideration. The decision was based on the Commissioner's conclusion, based on the facts that he was not satisfied that the donation of £200,000, which bridged the gap between £3.7m and £3.5m was just “pure coincidence”. It seemed to him that at some stage C Limited and the taxpayer decided upon the donation as a commercial expedient to push through the deal.

For further information, see page 33.

Oriel Support Ltd v R & C Commrs

Jurisdiction of Special Commissioners

This Special Commissioner's decision dealt with a preliminary issue on whether the Special Commissioners had jurisdiction to hear an appeal from the disputed decision regarding the use of employers’ PAYE references.

The taxpayer provided an administrative and financial outsourcing service for its clients who were other businesses and agencies. In particular, it paid earnings to workers who were employed by its clients. The taxpayer accepted that the workers were employed by the clients of the taxpayer and that the taxpayer was not the employer of the workers for employment law purposes.

In respect of the earnings which were paid to the workers the taxpayer accounted for PAYE to the Revenue but used its own employer's PAYE reference and not the employers’ PAYE references of each of its clients.

It was decided that the Special Commissioners did not have jurisdiction to hear an appeal from the disputed decision because their jurisdiction was statutory and the legislation gave no right of appeal to the Special Commissioners from a decision relating to care and management.

For further information, see page 34.

Langley v R & C Commrs

Foreign earnings deduction

This decision dealt with the benefit of the foreign earnings deduction for seafarers. It had been accepted by HMRC that the taxpayer satisfied all but one of the requirements for claiming the foreign earnings deduction. His duties were accepted to have been performed wholly or partly outside the UK, and were accepted to have been performed in the course of a qualifying period. The only point in contention was whether “the duties of the employment [were performed] as a seafarer”.

It was common ground that the issue turned on whether the vessel or structure on which the taxpayer performed his duties was “a ship”, since the legislation clearly provided that “employment as a seafarer” meant “an employment consisting of the performance of duties on a ship”. The structure or vessel on which the taxpayer performed his duties was a self-propelled oil drilling rig.

It was decided that the taxpayer was not entitled to the foreign earnings deduction for seafarers. In accordance with case law, the structure in this case ranked as a ship once it could operate under its own power. According to the Commissioner, it followed that a structure or vessel intended to operate under its own power but not yet capable of doing so (which was the position in this case) was not a ship.

For further information, see page 35.

Kent Food Ltd v R & C Commrs

Non-compete agreements

Shares in the taxpayer company were sold by its two shareholders, with one of the shareholders staying on as an employee. In addition, that shareholder signed a non-compete agreement with the purchaser. The consideration for the shares and the payment in respect of the non-compete agreement were declared in the capital gains tax return of the shareholders.

Neither tax nor NICs were deducted from the payment made in respect of the non-compete agreement. Subsequently a payment of tax was made to the Revenue. The issue in this case relates to the nonpayment of NICs.

It was decided that the non-compete payments should be liable to NICs. The reason for this decision was that the payments were made in relation to undertakings which were in connection with the employment he held or was about to hold with the taxpayer company.

For further information, see page 36.

Bysermaw Properties Ltd v R & C Commrs

Human Rights – penalties

The taxpayer appealed against the imposition of penalties resulting from the late filing of a PAYE return. The taxpayer, who had engaged one subcontractor in the relevant year, failed to make a return in respect of the subcontractor, until over 10 months after the date by which the return was required to be made. HMRC imposed penalties on the taxpayer.

The taxpayer appealed the imposition of the penalty on the basis that it was 50 times more onerous on a per capita basis than a comparable case and thus could not be considered proportionate to the aim of the legislation and that it constituted an infringement of the taxpayer's right to the peaceful enjoyment of its property guaranteed by the Human Rights Act 1998.

The Special Commissioner decided that the penalty was not disproportionate and did not constitute an infringement of the Human Rights Convention. The basis of the decision was that the penalties are fixed amounts and the Special Commissioner did not have power under the Human Rights Convention to overrule them. In addition, the Special Commissioners mentioned that this would have been his conclusion even if he had power.

For further information, see page 37.

Afsar v R & C Commrs

Fixed penalties

The taxpayer had previously appealed against two notices issued by HMRC under the Taxes Management Act, which required him to produce certain documents. The Special Commissioners had dismissed the appeal.

As the taxpayer had failed to comply with the Special Commissioners decision, HMRC had imposed fixed penalties. The taxpayer then appealed against those penalties.

The Special Commissioners decided that the Revenue were justified in issuing the fixed penalties. The basis for the decision was that the taxpayer did not have a reasonable excuse for failing to comply with the previous Special Commissioners decision.

For further information, see page 38.

Floyd v R & C Commrs

Closure notice

The taxpayer applied for a direction for the closure of an enquiry into his tax returns.

The Inspector gave as reasons for not closing the enquiries that she had concerns about the sales and purchases of the taxpayer's roofing business, and some unidentified deposits into the taxpayer or his spouse's bank or building society accounts.

The Special Commissioner decided that it was not appropriate to direct that a closure notice should be issued in respect of an enquiry where the taxpayer had provided insufficient information to enable the Revenue to complete their enquiries.

For further information, see page 39.

VAT and Duties Tribunals

Wadham College Oxford; Merton College Oxford

The appeals concerned the recovery of input tax by Wadham College Oxford and Merton College Oxford. These colleges gave consideration for goods and services which included VAT charged by their suppliers and made both taxable and exempt supplies. Each college had an entitlement under the agreed arrangements to the recovery of part of that input tax. The college claimed a deduction for, and repayment of, further amounts representing a further portion of its input tax.

Under the specific Guidelines the activities of a university or college were classified under various headings or “tunnels”, and a calculation made in relation to each tunnel of the input VAT which could be recovered in respect of the related activity.

It was common ground that in the relevant period each college used a special method based on the guidelines. Under that method it reclaimed input tax in relation to three particular tunnelled areas of activity: outside conferences, separate catering, and bar sales.

In University of Sussex (VAT decision 16221) the university had for some period made input tax claims on the basis of the specific Guidelines. The tribunal found that the input tax recoveries made by the appellant in that case did not properly give effect to that appellant's rights under the applicable EU Directive to the recovery of input tax. Broadly speaking it was on the basis of that decision that the taxpayers in this appeal claimed additional repayments of input tax.

The Tribunal adjourned that taxpayers’ appeal to enable the parties to agree additional amounts of input tax deductible in respect of the non-formulaic tunnelled outputs.

For further information, see page 40.

Virtue t/a Lammermuir Game Services

This appeal related to the sale of “serviced” plots of land in a development to “DIY housebuilders”. The sale price reflected the fact that the site, following various civil engineering works was “serviced,” enabling the individual plots to connect up to such services on or within adjacent land.

The broad issue in the appeal was whether the sale to each such DIY housebuilder constituted a single supply or several supplies for the purposes of VAT, and the consequent VAT treatment applicable to the supply or supplies.

It was decided that the supply was a single supply and was exempt for VAT purposes. The key issue in the decision was that the principal element of each transaction was the supply of land. The commercial reality was that there was only one supply, i.e. the supply of land which in the usual way involves a wide range of obligations on the part of the seller or supplier, for which only one price is paid.

The Tribunal also considered the alternative, i.e. the supply was a multiple supply, in the event that it was wrong in its conclusion. In this situation, it concluded that the land element was exempt and the services zero-rated.

For further information, see page 41.

Healthcare Leasing Ltd

The taxpayer was a company incorporated in Guernsey, and operating in premises in Guernsey. It carried on the business of leasing dental related equipment to dentists who were predominantly in the UK. The taxpayer had an agreement with a finance company under which certain services were provided.

The taxpayer registered as an overseas trader for UK VAT purposes. The purpose of the registration was to recover VAT incurred on the purchase of equipment and to account for VAT on sales of medical equipment. HMRC were of the view that the taxpayer was making supplies in the UK by reason of its fixed establishment in the UK and issued assessments in that regard. The taxpayer appealed against those assessments.

The Tribunal found that the taxpayer had no fixed establishment in the UK and that the finance company was not a fixed place of the taxpayer in the UK. It was found that the supplies were made by the taxpayer in Guernsey from its fixed establishment there.

The key issue in the decision was that while the introduction may have been made by the finance company to the taxpayer, the contract was entered into by the taxpayer in Guernsey, after deciding whether to sign the contract in Guernsey, payment was received in Guernsey direct from the lessee and the lease was administered in Guernsey.

For further information, see page 42.

Calltell Telecom Ltd

These appeals were the joined appeals of two companies. They were associated companies, in common ownership and control; and were wholesale dealers in mobile phones. They were both repayment traders, and rendered their VAT returns monthly. The Commissioners had refused to meet more than a small part of their repayment claims.

The Commissioners had significant misgivings about the claims and embarked on an extended verification process. That process led to decisions to disallow their respective claims, except to the extent that they related to overhead expenses and to one purchase of phones. The Commissioners were of the view that they were not required to pay the disputed input tax because the taxpayers dealt in goods knowing, or with the means of knowing, that their so doing was connected with a fraud elsewhere in the chain, or a related chain, of supply.

It was decided that

• “[The common owner] knew that the Appellants were engaged in transactions whose purpose was the commission of a fraud on the Commissioners;
• The Appellants’ creation and assembly of the documentation relating to each deal into which they entered and their due diligence were designed only to persuade the Commissioners that they were legitimate traders;
• The transactions between the two Appellants had no true purpose other than to shift their respective VAT liabilities and repayment claims;
• Every one of the transactions, including those described as contra-trading, had as its objective the defrauding of the Commissioners; The decision to withhold the Appellants’ repayment claims was correct.”

For further information, see page 43.