UK House of Lords

Fleming (t/a Bodycraft) v R &’ C Commrs; Conde Nast Publications v R&C Commrs [2008] UKHL2

VAT - refund of overpaid VAT

For commentary on this case, see Section 1.31 of the February 2008 issue of tax.point.

For further information, see page 23.

UK Court of Appeal (Civil Division)

Irving vR&C Commrs [2008] EWCA Civ 6

Income tax — employers’ contributions to FURBS

This appeal dealt with section 595 of the Income and Corporation Taxes Act 1988. That subsection raises a charge to tax where an employer “pays a sum” into an unapproved retirement benefit scheme with a view to the provision of relevant benefits for an employee. Any sum so paid, if not otherwise chargeable to income tax as the income of the employee, is deemed to be his income for the year of payment and assessable to tax under Schedule E.

The question in this appeal was whether that provision applied to a transfer by the employer to the scheme of assets other than a sum of cash. In this case, the employer made a transfer of shares.

It was held that a transfer of shares was the “payment of a sum” (as in the High Court). While the more natural meaning of the phrase “pays a sum” was “pays a sum of money”, it was concluded that the legislative provision had a wider meaning, including the transfer of non-cash assets, as the phrase in the context of s.595 pointed away from the conclusion that it should be narrowly constructed.

For further information, see page 26.

UK High Court (Chancery Division)

R&C Commrs v Weald Leasing Ltd [2008] EWHC30 (Ch)

VAT — tax advantage

The taxpayer was a member of a commercial group of companies carrying on insurance businesses but not a member of their VAT group. The taxpayer acquired from third parties goods of a kind needed, in the course of their insurance businesses, by two other members of the commercial group. So great a part of the group companies’ respective businesses consisted of the exempt supply of insurance that purchases of the goods by the two companies would have given rise to an input tax recovery by them of less than 1%. The taxpayer was not an exempt trader and, having paid the input tax associated with its purchase of the goods; it then obtained appropriate deductions from its output tax.

The taxpayer's acquisition was in the course of a scheme which involved interest-free loans from group companies to the taxpayer to enable the taxpayer to pay for the goods and then the leasing of the goods so acquired by the taxpayer to an interposed third party (which was neither a group company nor any relevant VAT group) and subleasings on from that interposed third party to the two group companies.

HMRC were of the view that they were entitled to label the whole scheme as consisting of abusive practice to such an extent to give HMRC the right to “redefine” the arrangement so as to undo all tax advantage which it might otherwise have conferred upon the group or the taxpayer.

The High Court dismissed the Revenue's appeal and held that the conferring of a tax advantage in the series of transactions was not abusive only where the series of transactions was not in the context of their normal commercial operations. This decision was based on the interpretation of the ECJ decision in Halifax where it was concluded that the application of Community legislation could not be extended to cover abusive practices by economic operators, i.e. transactions which were not carried out in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Community law.

For further information, see page 27.

R & C Commrs v Prizedome Ltd & Limitgood Ltd [2008] EWHC19 (Ch)

CGT — pre-entry losses

On 26 September 2000 Limitgood and Prizedome each acquired one-half of the issued share capital of a company from their parent (100%) for a consideration of £1 each. As at that date the company was worthless. The capital gains tax base cost for the parent of the company shares was £486,949,498. The deemed acquisition costs for the taxpayers was £243,474,749 each.

On 27 September 2000, another Group acquired the shares in Limitgood and Prizedome for a combined consideration of £4 million. On ceasing to be members of the other Group, Limitgood and Prizedome were each deemed to have disposed of their holdings in the recently acquired company at market value and thus to have realised capital tax losses. Those losses were pre-entry losses of Limitgood and Prizedome in relation to the new Group. Limitgood and Prizedome eachclaimed losses of £113,921,249 in their corporation tax self-assessment returns for the accounting period to 30 September 2000, being limited by reason of depreciatory dividends.

On 12 October 2000 other companies in the new chargeable gains Group realised gains totalling £28,956,478 which were treated as accruing to Limitgood by reason of elections. The new group was then subsumed into another group. After that time, Limitgood claimed to set off losses of £28,956,478 against the gains. Further losses were used in later years against chargeable gains arising in other group companies.

Revenue contended that the losses were pre-entry losses of the new Group and hence could not be set against the chargeable gains.

It was held that the losses of the two companies before they became members of one group could not be set off against chargeable gains made by other companies on disposals made after those companies and the taxpayers had all become members of the second group. In reaching this conclusion, emphasis was placed on the underlying purpose of the legislation and the more literal approach was rejected.

For further information, see page 28.

R&C Commrs v Weight Watchers (UK) Ltd [2008] EWHC 53 (Ch)

VAT — single/multiple supplies

“This appeal concerns whether customers of [Weight Watchers (UK) Limited], who attend weekly meetings at which they are weighed and can then remain to attend a talk and discussion period but in any event also receive a handbook and other printed material at the meetings, receive single standard-rated supplies of a weight loss programme or separate supplies of zero rated printed material and standard-rated support services.”

The transaction was considered in terms of the first meeting and subsequent meetings.

The appeal was dismissed insofar as it related to the transaction involved in the first meeting. Separate fees were charged at the initial meeting for registration and for attendance at that meeting. However, a customer could not attend as a member without paying the registration fee, except when there was a special promotion, and could not register without paying the meeting fee for that week. As regards the first meeting, both sides to this dispute and the Tribunal proceeded on the basis that there was a single transaction at the first meeting and the consideration for the transaction was the registration fee and the meeting fee for that week. The Tribunal held that this transaction comprised separate supplies of services and printed materials.

The appeal was allowed in relation to the treatment of the transaction at a subsequent meeting, i.e. it would be artificial to differentiate between the services and the printed material at a subsequent meeting.

For further information, see page 29.

Brunel Motor Co Ltd v R &’ C Commrs & Anor [2008] EWHC 74 (Ch)

VAT — repossessed goods and credit notes

The taxpayer, a motor dealer, had acquired motor vehicles and claimed input tax attributable to the supply of the vehicles. The taxpayer was then put into receivership. As a result of specific terms, the Supply Agreement terminated automatically on the appointment of Administrative Receivers. The vehicles had been repossessed when the receiver had been appointed and credit notes issued to the taxpayer. The receivers repaid the VAT to Customs. The vehicles were subsequently resupplied to the receiver to allow him to continue running the business.

The taxpayer argued that the VAT repaid by the receiver was incorrectly paid and sought repayment of the VAT. The basis for this argument was that they were still liable to pay the price for the vehicles and hence the credit notes had no effect.

Customs argued that credit notes issued by the supplier obliged the taxpayer to repay the VAT shown on the credit notes.

The High Court held that the Tribunal (which decided in favour of Customs) was entitled to decide that taxpayer was not entitled to a repayment of the input VAT which had been paid by the receiver. In addition, it was stated that had the matter come to the Court afresh it would have come to the precisely the same conclusion.

For further information, see page 31.

R &’ C Commrs v Dempster (t/a Boulevard) [2008] EWHC 63 (Ch)

VAT — fraudulent arrangements

This is an appeal by HMRC against a decision of the VAT Tribunal which allowed the appeal of taxpayer against HMRC's refusal of his claim for an input VAT credit.

The taxpayer's claim was based upon two alleged supplies of computer software by a supplier in January 2004, supported by invoices from the supplier, dated respectively 12^th and 26^th January, and which differed from each other only in their respective dates and invoice reference numbers.

In order to decide whether to accept or reject the taxpayer's claim, HMRC had sought and obtained from him a compact disc purporting to contain a copy of the software which was the subject matter of his claim. HMRC refused the taxpayer's claim because, first, they were not satisfied that taxable supplies had occurred in accordance with the claimed transaction, and, secondly, that the contents of the Disc were inconsistent with the description of the relevant goods contained in the supporting VAT invoices.

The High Court upheld the decision of the Tribunal that the taxpayer was entitled to input credit on the supplies. The basis for the decision was that it had not been established that the taxpayer knew that the transactions were shams.

If the Court had been deciding the question on the materials available to it, it might well have concluded that HMRC's analysis was correct on the balance of probabilities; but as the Tribunal are the arbiters of fact, their conclusion could only be successfully appealed if it was reached by an error of law, or was one which was perverse; i.e. beyond reason; which was not the case here.

For further information, see page 32.

Harding v R & C Commrs [2008] EWHC 99 (Ch)

CGT — loan notes

A gain arose on the redemption of certain loan notes by the taxpayer. The issue in the appeal was whether the loan notes were, or were not, qualifying corporate bonds at that time.

The holder of each loan note had an option, exercisable during the ten day period following the giving of a redemption notice, to have the loan note redeemed in US dollars, Canadian dollars or German deutschmarks, at a defined exchange rate. The legislation defining qualifying corporate bonds includes a condition that no provision is made for conversion into or redemption in, a currency other than sterling.

The key issue related to whether it was possible for the loan notes to change status — at acquisition, the loan notes were not qualifying corporate bonds, but at the time of redemption (which occurred after the ten day period) the taxpayer argued that the loan notes were qualifying corporate bonds.

The High Court held that the loan notes were not qualifying corporate bonds. The basis for the decision was that the test for determining whether the loan notes were qualifying corporate bonds had to be conducted by reference to the terms of the security rather than a point of time test.

For further information, see page 33.

Underwood v R&C Commrs [2008] EWHC 108 (Ch)

CGT — beneficial interest

The taxpayer acquired the property in 1990 for £1.4 million. Not long thereafter the market for property of that type went into serious decline, such that by 1993 it was professionally valued as having an open market value of £400,000 and a forced sale value of £290,000.

By a contract dated 2^nd April 1993 the taxpayer agreed to sell the property to a company as beneficial owner, with vacant possession, for £400,000, with a contractual completion date of 31^st December 1993.

On the same day as the 1993 Contract was made, the parties entered into an option agreement by which the company granted to the taxpayer the right, by notice in writing served at any time before 31^st December 1995, to re-purchase the property. The price payable upon exercise of the Option was to be £400,000, plus the cost of any capital improvements, maintenance or insuranceof the property by the company, plus 10% of any difference between the sum thus identified and the value of the property on the date of exercise of the option (to be determined if necessary by an expert). The premium for the grant of the option was £1.

During the year of assessment which ended three days later the taxpayer had made substantial chargeable gains on other assets and, although this affected only the timing of the sale rather than the decision to sell, he hoped to crystallise a substantial loss upon performance of that contract. In his tax return for the year ending 5^th April 1993 he claimed a loss in relation to the property of £1.174 million.

However, the contract was not completed. The parties agreed that the taxpayer would repurchase the property, which had the same effect as the original contract and option. The taxpayer subsequently sold the property to another company (to which he was connected).

The Revenue were of the view that the taxpayer had not disposed his beneficial interest in the property in 1993 and hence was not entitled to loss relief for that year of assessment.

The High Court upheld the decision of the Special Commissioners that the taxpayer had not disposed of his beneficial interest in the property. The basis for the decision was that there was no performance of the 1993 contract or the later contract and hence there was no transfer of beneficial interest in the property.

For further information, see page 35.

Special Commissioners

Dunne v R &’ C Commrs

Sch E — deferred benefits from pension scheme

The dispute concerned whether the transfer of the taxpayer's accrued pension benefits from the Lattice Group Pension Scheme to the Holme Limited Pension Plan which took place in September 2001 was chargeable to tax.

The taxpayer asserted that he had received no payment from the pension schemes and that he was an employee of Holme Limited.

HMRC contended that the transfer was a sham, devised to enable the taxpayer to gain access to accrued pension benefits in advance of retirement. They submitted that the taxpayer was not an employee of Holme Limited. Further the taxpayer obtained early payment from the pension fund in the form of a loan.

The Special Commissioner decided that the taxpayer was subject to schedule E on the transfer of the accrued benefits from one pension scheme to another scheme as the tax payer was not an employee of the second company.

The Special Commissioner found that the “employment” relationship between the Appellant and Holme Limited was a sham, operating as a cover to enable the Appellant to draw out pension benefits in advance of his retirement. The Appellant had supplied no evidence to contradict the conclusion that his “employment” with Holme Limited was a sham. It was held that the Appellant was not employed under a contract of service with Holme Ltd. For further information, see page 36.

Dragonfly Consulting Ltd v R&C Commrs

Contractor ... employee or not?

The taxpayer agreed to make the sole director/50% shareholder's services available to a company in relation to three IT projects.

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.

The Special Commissioners agreed with Revenue.

This is a similar decision to the two Special Commissioners’ decisions in the February 2008 issue of tax.point [First Word Software Ltd v R & C Commrs; and MKM Consulting Ltd v R & C Commrs] and the one below.

For further details, see page 37.

Datagate Services Ltd v R&C Commrs

Contractor ... 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 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 organisation, he would have been regarded as employed by, and as an employee of, that organisation. From that it followed 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 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 following quote outlines the basis for the decision:

“Standing back and “looking at the picture as a whole” I find it a primary fact that Bret Barnett was in business on his own account and was not a person working as an employee in someone else's business on the hypothetical requirements that the legislation requires. He chose to do this through his company.” For further information, see page 38.

J D Wetherspoon plc v R &’ C Commrs

Capital allowances ... refurbishment

This appeal concerns capital allowances for expenditure on fitting out and refurbishing public houses; one was converted from a theatre and the other converted from two high street shops.

There were three issues before the Special Commissioners:

• Whether some items of expenditure qualified as plant;
• Whether other items of expenditure qualified as building alterations incidental to the installation of plant;
• Whether certain site overhead expenditure or preliminaries, including professional fees, such as structural engineers and planning supervisory fees, was in part attributable to expenditure above, and if so how it should be allocated.

The following is a summary of the decision:

• The decorative panelling which had been taken as an example of embellishment did not qualify as plant because it was more appropriately described as having become part of the premises than as having retained a separate identity.
• The kitchen tiles did not have a sufficient nexus with the installation of equipment such as cookers to be incidental thereto. The partitions and doors to toilets and cubicles did however have sufficient nexus with the installation of the toilets. The drainage items either fell as being a trade specific sewerage system or were incidental alterations.
• The expression “preliminaries” was not precise. There was no basis in law for excluding preliminaries from the cost of qualifying expenditure.

It is important to note that this case is based on two public houses, and sample expenditure therein only. For further information, see page 39.

VAT and Duties Tribunals

Hargreaves (UK) plc

Two companies in the VAT group of which the appellant company, Hargreaves (UK) plc, was the representative member, purchased fuel for the road vehicles used in their haulage businesses from fraudsters. It transpired that most of the fuel purchased was laundered, rebated fuel which it was illegal to use in road vehicles.

On their VAT invoices, the suppliers of the fuel showed VAT which the taxpayer paid to them. The taxpayer then claimed that sum as input tax. On the basis that all the fuel purchased was laundered, rebated fuel, HMRC denied its entitlement to recovery.

The Tribunal decided that the taxpayer was not entitled to claim input tax. Applying the clear principles laid down by the ECJ, since the supply and use of laundered, rebated fuel is illegal throughout the EU, and all competition between fuel launderers and genuine fuel distributors is prohibited, in the Tribunal's judgement such products fell on the same side of the line referred to in the ECJ as do narcotic drugs and counterfeit money so that they are outside the scope of VAT.

For further information, see page 42.

InsuranceWide.com Services Ltd

InsuranceWide was formed in 1999 with the intention of being a conduit for the sale of insurance via the internet. In effect it provided a comparison service to individuals for insurance cover from various insurance companies. This was done via an on-line computer website. It received commission from the insurers based on the number of contracts of insurance that result from the introductions.

The principal issue for the Tribunal to decide was whether the supplies made by InsuranceWide fell outside the VAT exemption, which exempts the provision by an insurance agent or broker of the services of an insurance intermediary.

The Tribunal decided that InsuranceWide did not act as an insurance agent at any stage - it had no power to bind the insurance company, it specifically disclaimed being an agent and it had played no role in negotiating the terms of any insurance contract.

For further information, see page 43.