UK Court of Appeal (Civil Division)

Baxi Group Ltd v R & C Commrs [2007] EWCA Civ 1378

VAT – reward scheme

This is an appeal by the Revenue of a High Court decision which was made in December 2006.

The taxpayer was the representative member of a VAT group, one member of which manufactured domestic heating boilers. The taxpayer operated a bonus scheme, which allowed the installers of the boilers to earn points which could be converted into goods. The taxpayer engaged a marketing company to administer the scheme. The taxpayer argued that the marketing company had made a single supply of marketing services and that the VAT charged was deductible as input tax. The Revenue argued that either the goods were supplied directly from the marketing company to the installer; or there was one supply from the marketing company to the taxpayer company and another supply from the taxpayer to the installer.

It was held in the High Court that the reward scheme constituted a single supply of marketing services so that all the VAT paid to the marketing company delegated to run the scheme could be deducted as input credit.

The Court of Appeal dismissed the Revenue's appeal. The advertising and marketing services which the marketing company provided were not economically dissociable from the provision of goods to the installer.

For further details, see page 30.

UK High Court (Chancery Division)

Stockler Charity (a firm) v R & C Commrs [2007] EWHC 2967 (Ch)

Penalties

The taxpayer was a firm of solicitors. Mr William Stockler had at all material times been a partner in that firm. Mr Stockler was the partner responsible for preparing the partnership tax return and was the representative partner for the purposes of the Taxes Management Act 1970

HMRC were of the view that, in computing the amount of the profits of the firm, certain sums had been deducted which were not wholly and exclusively laid out for the purpose of the profession of the firm. These were sums which HMRC considered were simply personal liabilities of Mr Stockler. HMRC accordingly amended the partnership return on the basis that Mr Stockler was guilty of negligence.

The firm appealed against that amendment. The Special Commissioners dismissed the firm's appeal. The firm appealed to the High Court on 25 January 2007.

Mr Stockler said that he offered to settle the whole dispute upon payment of the full amount of tax claimed (less certain disbursements) plus interest but without any penalties. No agreement was reached. The firm then made an offer under a different legislative provision to settle the firm's appeal. The offer is contained in a letter dated 17 May 2007 to HMRC.

HMRC agreed to the offer, with the following quote from its letter

• “We are aware that you have previously been in discussion with our colleagues regarding financial penalties, and we are instructed to make it clear, for the avoidance of any possible doubt, that acceptance of the Part 36 offer is of course entirely without prejudice to any penalty determination which may follow hereafter. Penalties are not, of course, in issue in the present proceedings.”

On 16 October 2007, HMRC wrote to Mr Stockler to inform him that they had made a penalty determination “in respect of your incorrect returns of your liability to tax for the years, 1996/97, 1997/98 and 1998/99”. They said that the penalty “is a tax geared penalty as provided for in s95 Taxes Management Act 1970”.

On 31 October 2007, Mr Stockler appealed against the penalty determination. On 7 November 2007, Mr Stockler issued the present application in the Firm's appeal against the decision of the Special Commissioners. Its wording – “failed to honour the terms of the…offer”.

The High Court found in favour of the Revenue on the basis that it was not the purpose of the Revenue or the settlement agreement to preclude the issuing of penalties.

For further information, see page 31

Special Commissioners

Re an application by R & C Commrs to serve a TMA 1970, S.20(3) notice on a plc and a s.20(1) notice on its subsidiary company

Professional Privilege

This decision dealt with a notice by the Revenue to a parent company and its subsidiary to deliver documents in connection with the subsidiary's tax liability.

The Taxes Management Act deals with the Revenue's power in relation to the delivery of documents relating to a tax liability. Specific provisions deal with the power of the Revenue in relation to documents which are the property of the tax advisor.

The parent company argued that the documents requested were part of a chain of correspondence the dominant purpose of which was the obtaining of legal advice. However, it recognised that legal professional privilege (LPP) did not apply. Rather it argued, based on case law (Morgan Greenfell) and part of the TMA, that LPP should apply to accountants’ advice when it relates to tax.

The Special Commissioner decided that the documents requested which contained the taxpayer's accountants’ advice by the Revenue did not impliedly qualify for professional privilege and as they did not relate to those documents protected by LPP, the Revenue was entitled to the requested documents.

For further information, see page 34

Elizabeth Court (Bournemouth) Ltd v R & C Commrs

Stamp duty land tax relief

Elizabeth Court was a block of 133 flats.

• On 3 April 1967 the owner of the freehold granted a long lease (the headlease). The lessee of the headlease then granted leases of the individual flats to what were referred to as the flat owners.
• In 2003 117 out of 131 of the flat owners decided to acquire the freehold and the headlease. Each flat owner entered into a Participation Agreement with the Appellant and agreed to exercise the right to collective enfranchisement under the 1993 Act and to appoint a company limited by shares with the same name as the Appellant as nominee purchaser.
• The Appellant was incorporated on 22 December 2004 as a company limited by guarantee. By notice dated 24 December 2004 it replaced the company of the same name but limited by shares as the nominee purchaser.

While the transaction was subject to stamp duty land tax, the taxpayer argued that it was entitled to relief on the grounds that it met the definition of a right to enfranchise (RTE) company. The Special Commissioners found against the taxpayer as the provisions of the relevant legislation had not come into force at the time of the transaction, hence it was not a transaction entered into by an RTE company in pursuance of a right of collective enfranchisement.

For further information, see page 35

Hankinson v R & C Commrs

Discovery assessment — preliminary hearing

The taxpayer had appealed against a discovery assessment made against him in respect of the tax year 1998/99. He also appealed against a notice of determination that he was ordinarily resident in the UK in that year of assessment. He applied for a preliminary hearing to determine the issue of whether the “discovery” assessment was competent for the purposes of the Taxes Management Act 1970.

The Appeal Commissioners found against the taxpayer on the basis that it was not appropriate to order a preliminary hearing to be conducted separately and in advance of hearing into the residency of the taxpayer. The reason for the decision was that the issues were common to both and should be heard together. For further information, see page 36

Mr A v R & C Commrs

Jurisdiction of Special and General Commissioners

In this Special Commissioner's decision, the taxpayer appealed against a notice under a specific provision of the Taxes Management Act 1970 requesting documents and information for the purpose of HMRC's enquiry into his return for 2004/05. The grounds for appeal were that in view of his ill health, known to HMRC at the time of issue of the notice, HMRC had been unreasonable in pursuing the enquiry as quickly as they had; they should have deferred the enquiry and not issued the notice in order to support the taxpayer's recovery.

The Commissioners had the express jurisdiction to determine whether the “production of the documents or information or the furnishing of the account or particulars” was reasonably required for the purposes of determining whether the taxpayer's return was or was not correct and complete.

Whether HMRC acted reasonably in issuing the notice and setting the compliance date in relation to a request for particular documents and information that were reasonably required was a different matter. It goes to the question of whether HMRC had, in the particular circumstances, acted in accordance with principles of good administration by issuing such a notice.

The Special Commissioner decided not to set aside the notice.

For further details, see page 36.

Nightswood BV v R & C Commrs

Award of costs

This decision concerned HMRC's application for costs following the taxpayer's withdrawal of its appeal.

The Special Commissioner dismissed HMRC's appeal. The basis for the decision was that it had not been shown that the behaviour of the taxpayer's representative was “wholly” unreasonable.

For further details, see page 37.

First Word Software Ltd v R & C Commrs

Contractor … an employee or not?

The sole director and shareholder of the taxpayer was a computer consultant. He supplied services to the taxpayer who supplied them to an organisation who supplied them to another organisation.

Revenue were of the view that the circumstances were such that, if the services had been performed under a contract between the shareholder/director and the final organisation, he would have been regarded as employed by, and as an employee of, that organisation. From that it followed under the IR 35 legislation that the taxpayer, as an intermediary, was liable to pay national insurance contributions and income tax under PAYE in respect of the payments made to shareholder.

The taxpayer appealed because it was of the view that, if the services had been performed under a contract between the shareholder/director and the final organisation, he would not be regarded as employed by, or an employee of, that organisation and so the provisions about the supply of services through an intermediary did not apply.

It was decided that shareholder/director would not be regarded as an employee if he had been engaged directly and so the intermediary was not liable to NICs and income tax under PAYE.

The basis of the decision was as follows:

• The taxpayer had the right to substitute someone else for the shareholder/director;
• The shareholder/director was not controlled by the final organisation, as an employer would control an employee;
• The final organisation was not under any obligation to supply further work to the shareholder/director;
• The shareholder/director was in business on his own account;
• The shareholder/director got paid a weekly wage or an annual salary. He was paid in accordance with the volume of work done.

For further details, see page 38.

MKM Computing Ltd v R & C Commrs

Contractor … an employee or not?

The taxpayer agreed to make the sole director/50% shareholder's services available to a company engaged in the business of making contract workers available to its clients. The Revenue concluded that the circumstances were such that had the director been directly contracting with the company the nature of the arrangements would have led to the conclusion that he was an employee and accordingly that, under the IR 35 legislation the taxpayer was liable to NI and PAYE.

This is a similar decision to the one above, however, the decision went the other way, i.e. the director would have been regarded as an employee if he had been engaged directly by the client.

In summary, the Special Commissioner decided that the director was not in the position of a painter engaged to paint a room; he was in the position of a painter employed to paint such parts of the house as his employer would from time to time require.

For further details, see page 39.

VAT and Duties Tribunals

Selfridges Retail Ltd

This appeal concerned the VAT consequences when cheques paid by customers for retail supplies were dishonoured but the retailer was paid the full amount of the cheques by a third party which had provided a guarantee under an agreement with the retailer.

Taxpayer's position: when the cheques were dishonoured it was entitled to make a deduction from its daily gross takings under its bespoke retail scheme. The amounts received in place of the cheques were not consideration for supplies, being compensation and not taxable; alternatively, they were consideration for the assignment of debts and therefore exempt.

Customs’ position: the receipts were third party consideration for supplies by the taxpayer to customers and were not consideration for the assignment of debts.

The Tribunal found that the payments were not consideration for the supplies by the taxpayer to its customers and were not liable to VAT. The key issue in the decision was that the sums received by the taxpayer were not in return for the sales to customers but were in respect of its entitlement under the third party agreement when cheques were dishonoured.

For further information, see page 40.

RBS Deutschland Holdings GmbH

The issue which arises in this appeal was whether the taxpayer had right to a repayment of VAT paid on the purchase of new cars, later supplied by it in terms of a lease, and finally re-sold after about two years.

The taxpayer was a subsidiary company in the Royal Bank of Scotland Group. It was a company incorporated in Germany and registered as a non-established taxable person for VAT purposes within the UK. While the cars were situated in the UK the supply of them in terms of the leasing arrangements was outside the scope of UK VAT as being a supply of services deemed to have been made in Germany where the Appellant has an establishment—it had no establishment within the UK. In terms of German VAT Law the supply represented a supply of goods, but not one made in Germany as the vehicles remained in the UK.

In essence while in terms of Community Law and the terms of the Sixth Directive the leasing of the cars represented a taxable supply, the VAT provisions of each of the two Member States concerned resulted in no output tax being charged on the rental payments in either territory.

The taxpayer was seeking to reclaim the input tax paid on the new cars. It argued that notwithstanding the absence of a tax charge they remained “taxable” in the context of the VAT system. The Revenue argued that the rentals were analogous to an exempt transaction. The mere fact that no tax was levied took the rentals out of the VAT system.

The Tribunal found in favour of the taxpayer that the VAT on the new vehicles purchased by the taxpayer was repayable to it as recoverable input tax.

A key issue in its decision was that car leasing locally based was taxable for VAT purposes in both the UK and Germany. In addition, the objective of economic neutrality in the VAT system was ensuring that the ultimate consumer bears the tax burden. The ultimate consumers in this case was be the lessees of the vehicles and also, on the expiry of the leases, the purchasers of the vehicles second-hand.

For further information, see page 41.

Axa UK plc

The taxpayer is part of a group which provided a service to dentists who had become members and had entered into agreements with private patients for plans setting out the dental care to be provided for a monthly fee in the course of a year. The dentist arranged with a group company that the patient pays the group company the monthly fee by direct debit. The group company took a fee out of the monthly payment, paid an insurance premium to another group company to cover emergency treatment, and accounted to the dentist for the balance. The dentist was relieved of any work in collecting fees for patients registered in the plan.

The issue was whether the service supply for the monthly fee was exempt as a financial service.

The total supplies made by the group company were: payment handling, making reports to the dentists of payments and non-payments; goodwill transfers; support in setting fees; Denplan product training; use of Denplan brand name and logos; advertising the member's practice on the Appellant's website; access to the member-only section of the website which includes a forum; quality audits; complaints handling, and arbitration.

It was decided that the group's services were not a single service but a number of services of which payment handling was the principal one; and that the payment handling service (a large proportion of the fee) was exempt as a financial service.

For further details, see page 42.

Leisure Pass Group Ltd

The issue in this appeal was whether the London Pass, which is purchased for a fixed sum depending on the number of days’ validity and entitles the holder to entry to a number of attractions in London without further payment, fell within the definition of face-value voucher. It was decided that the pass was not a “face-value” voucher.

• The first part of the definition was that it must be a “voucher (whether in physical or electronic form) ” It was concluded that the pass was a voucher that was partly in physical form and partly in electronic form.
• The next part of the definition was “that represents a right to receive goods or services ”. It was concluded that the pass represented a right to receive services in the form of free entry to such of the attractions that the holder decides to visit and to the other benefits.
• The problem surrounded the third part of the definition “to the value of any amount stated on it or recorded in it,” as the right represented by the pass was not, viewed realistically, that the holder had the right to visit attractions to any stated (or recorded) value; it was to visit such of the attractions he had chosen.

The Tribunal commented that the decision might have been different if the pass had entitled the holder to admission to attractions having a gate price up to the value of £X.

For further details, see page 43.

Standard Life Assurance Co

The taxpayer's main activities were the provision of assurance, insurance and banking services. It also provided investment services and had a portfolio of investment properties. There were also other activities, some taxable and some exempt.

The appeal concerned the refusal of two voluntary disclosures submitted by the taxpayer for £2,545,450 and £10,313,234 respectively. The question in issue between the parties concerned the attribution of input tax to foreign and specified supplies pursuant to an agreement between the Revenue and the taxpayer (Partial Exemption Special Method).

The disputed voluntary disclosures were made up principally of residual input tax on costs incurred in the marketing, establishing and ongoing servicing of supplies of life insurance, pensions and related products and services by the taxpayer's UK Life & Pensions business, plus savings products and related financial services supplied by Standard Life Bank (“the relevant supplies”). The relevant supplies included supplies to non-EU residents.

The Revenue's view of the interpretation was that in construing the special method, it should be assessed against the measure of what is sensible within the overall objective of a fair and reasonable attribution of input tax. The taxpayer had argued that the agreement should be construed by considering the whole expressed terms and any admissible surrounding circumstances in order to ascertain the meaning of the words.

The Tribunal allowed the taxpayer's appeal, on the basis that the taxpayer was correct in its construction of the agreement.

For further details, see page 44.

Healthcare at Home Ltd

The taxpayer made a number of different kinds of supply of medical services. It did so pursuant to contracts into which it had entered with the NHS, private medical insurers and some pharmaceutical manufacturers.

Only one of the supplies made by the taxpayer was in issue in this appeal, namely the administration by nurses of drugs prescribed for patients, to those patients in their own homes. The taxpayer contended that it was making zero-rated supplies of drugs; the Revenue's view was that it was making exempt supplies of medical services.

The tribunal allowed the company's appeal. The basis for the decision was that in those cases in which a nurse attended a patient's home to administer a drug supplied by the taxpayer, the supply was and remained a supply of goods. The same was the case when the nurse attended in order to instruct the patient in the self-administration of the drug: what was supplied in these circumstances was less medical care than the demonstration to the patient of the correct method of using the goods which have been supplied to him.

For further details, see page 45.