UK Court of Appeal (Civil Division)

R e3 C Commrs v Weight Watchers (UK) Ltd [2008] EWCA Civ 715

VAT – one standard-rated supply

The newly enrolled member of Weight Watchers (WW) paid £9 for enrolment and £4.95 for the meeting; the existing member paid £4.95 for the meeting. The issue was whether Weight Watchers was supplying one standard rated weight loss programme (as contended by HMRC) or two separate supplies – a zero-rated supply of the printed materials and a standard-rated supply of the other goods and services (as contended by Weight Watchers).

The High Court had held that consideration in respect of the initial meeting should be treated as being in relation to separate supplies, but that it would be artificial to differentiate between standard-rated support services and zero-rated printed material for the weekly meetings. (See the March 2008 issue if tax.point for the High Court Report and corresponding ICAI Commentary).

The taxpayer appealed against the initial meeting ruling and HMRC against the subsequent meetings ruling. The Court of Appeal found in favour of the HMRC appeal and against the taxpayer's appeal, i.e. it found that the supply was that of a single standard-rated supply.

The following six reasons were given for the decision:

1. The typical consumer is or is about to become a member of WW.
2. The purpose of such a consumer in being or becoming a member is to obtain the benefit of the weight loss programme marketed by WW under the title “Switch”.
3. One of the cardinal features of that programme for a member entitled to attend meetings, unlike At Home or Online members, is the reinforcing combination of the diets as taught in the Handbook and the group therapy to be derived from the meetings.
4. If it is the combination which the Meeting Member is buying, then it makes no sense from an economic point of view to pay (be charged) separately for the meetings and the publications.
5. There is no difference between one meeting and another except in the case of a customer who is enrolling for the first time or enrolling again so as to attend the meeting without paying for missed meetings since the last enrolment. He or she is not a typical consumer, as described, but a subset of that class, and is only paying the higher price in order to obtain or continue to obtain the benefit of the combination mentioned.
6. It follows that the events of the first meeting, from the point of view of the enrolling member, are merely a necessary preliminary to obtaining the benefits of the programme as a whole at that and any subsequent meeting that member attends.

For further information, see page 33.

UK High Court (Chancery Division)

Calltell Telecom. Ltd S' Anor v R e3 C Commrs

MTAC fraud – Security for costs

In this case, the Tribunal had decided that the taxpayer had entered into wholly artificial transactions and hence upheld a decision by Revenue to refuse payment of VAT refunds for three amounts in the combined sum of over £18 million.

The taxpayer appealed to the High Court but Revenue applied for security from the taxpayer in respect of costs for the appeal. The reason for Revenue's argument was that the taxpayer was insolvent and it was unlikely that they would be in a position to pay costs if it lost the appeal. The taxpayer opposed Revenue's application.

The High Court granted application by Revenue for an order for security in respect of costs. The burden had been on the taxpayer to show that the order for security would stifle its appeal. The taxpayer provided no independent evidence.

For further information, see page 34.

Sokoya v R e3 C Commrs

Administration – production of documents

The taxpayer filed a return showing income of £4,560 from employment and no other income. HMRC sent a notice to the taxpayer advising that they would be carrying out an enquiry and requesting further information. HMRC had to send a second notice as they had received no reply in relation to the first.

The taxpayer appealed against the notice on the basis that the information requested was superfluous. He contended that HMRC had no power to enquire into those items where there was no entry in the tax return.

HMRC contended that they needed to check that there was no other income and they required the information to conclude on this point.

It was held by the High Court that HMRC were entitled to request production of the documents as they were reasonably required for the purpose of determining whether the tax return was incorrect or incomplete.

For further information, see page 36.

Astall & Anor v R & C Commrs [2008] EWHC 1471 (Ch)

Deep discount on security redemption

This is an appeal by two taxpayers who are sample participants in a tax avoidance scheme which was based on the definition of relevant discounted securities.

The scheme consisted of each of the Appellants settling a small sum in a trust under which he had a life interest. The settlor lent money to the trust in return for a security issued by one of the trustees, a company. The redemption terms were designed to satisfy the definition of a relevant discounted security. The object was that the Appellant claim the difference between the issue price and 6% of the issue price as a loss on a relevant discounted security, while the difference remained in the trust for the benefit of the Appellant.

The Special Commissioners had decided that the tax avoidance scheme involving a deep discount on the redemption of securities did not fall within the statutory definition of a relevant discounted security. The reason for this decision was that the relevant statutory provisions were not intended to apply to such a transaction – for the purposes of construing the definition, regard should be had only to real possibilities of redemption rather than those written into the security which the parties knew would never happen.

The High Court upheld the Special Commissioner's decision which meant that the Appellants had not sustained losses from the discount on relevant discounted securities within the meaning of the relevant legislation. This ruling means that the purpose of the avoidance scheme was not achieved.

For further information, see page 37.

Refson v R & C Commrs

Legitimate Expectation – jurisdiction of High Court

This case should interest any Chartered Accountant who contacted a Revenue Office in relation to a question only to have the question treated differently when the return was processed.

In this case, the taxpayer had contacted the tax office to enquire if certain business travel expenses were allowed. He was told that the expenses would be allowed provided they were reasonable. When the taxpayer submitted his claim, the expenses were not allowed.

The taxpayer appealed on the basis that it was unreasonable for the Revenue to retract what they had told him previously. The appeal was dismissed as there was no record of the call. The taxpayer then appealed to the High Court – Chancery Division on the basis of legitimate expectation.

The Chancery Divison ruled that it did not have jurisdiction to decide on the appeal – an application to the Administrative Court (a separate part of the High Court) was necessary.

It was noted that a taxpayer would only have a legitimate expectation that he could hold Revenue to a ruling or statement regarding his fiscal affairs if he had approached them with clear, concise proposals, made it plain that a considered ruling was sought and indicated he intended to use any ruling.

So bear this in mind the next time you hear a favourable response during a phone call with Revenue...

For further information, see page 38.

UK High Court (Administrative Court)

R (on the application of Oriel Support Ltd) v R & C Commrs [2008] EWHC 1304 (Admin)

Client's VAT and PAYE – using own reference number

The taxpayer provided administrative and bookkeeping services to other businesses and agencies. As part of its work, the taxpayer paid earnings to workers who were employed by its clients and accounted to Revenue for PAYE and NICs (even though it did not employ the workers itself). The Revenue contended that the taxpayer was not entitled to account for PAYE in respect of client employees under its own employer's PAYE number.

It was held that the taxpayer was not entitled to use its own employer's PAYE number. The reason for the decision was that the taxpayer was not an “other payer” under PAYE regulations as the employees were not “other payees”.

This case is a timely reminder if you are providing such services to ensure that you are using the correct PAYE number.

For further information, see page 39.

Special Commissioners

Thorpe v R & C Commrs

Pension Scheme

The Appellant was the administrator and the sole remaining member of a small self-administered pension scheme. The Board of Inland Revenue accepted that the Scheme was an exempt approved scheme.

The Appellant withdrew the sum of £200,000 on 2 December 1998, the sum of £12,000 on 30 December 1999 and the remaining balance of £60,499.19 on 21 July 2000. The payments were not included in the taxpayer's tax return. The Appellant informed the Pension Schemes Office that he had become the sole beneficiary of the trusts of the Scheme and that he had wound up the trust pursuant to the rule in Saunders v. vautier. The Pension Schemes Office informed the Appellant that it was not satisfied that the Pensioneer Trustee had been correctly removed. It also stated that the Appellant was unable to wind up the Scheme under the rule in Saunders v. Vautier.

The Saunders v Vautier rule is as follows:

“Although the beneficiaries cannot, in general, control the trustees while the trust remains in being, or commit them to particular dealings with the trust property, they can, if sui juris and together entitled to the whole beneficial interest, put an end to the trust and direct the trustees to hand over the trust property as they direct; and this is so even if the trust deed contains express provisions for the determination of the trust.”

The Special Commissioner decided that the taxpayer was not entitled to use the rule in Saunders v Vautier to avoid liability to income tax. There remained the possibility that persons other than the Appellant might be entitled to an interest under the trusts of the Scheme – the Appellant didn't rule out the possibility of remarriage. In the circumstances, the Appellant was not entitled to the whole beneficial interest and, accordingly, was not entitled to call for a transfer of the trust property under the rule in Saunders v. Vautier.

Another rule (Re Hastings-Bass) was also mentioned by the Appellant. He acted, in his capacity as a trustee, in good faith and in accordance with his understanding of the law. In the circumstances, it was argued that he should be allowed to rely on the rule, or principle, established in Re Hastings-Bass and should be given the opportunity to put right his mistake by re-instating the trust fund. This was rejected by the Special Commissioner as the principle in Re Hastings-Bass was not applicable as it did not provide relief from the consequences of the act of a beneficiary.

For further information, see page 40.

Burt v R & C Commrs

Retirement Relief

The taxpayer and two other directors (all of whom owned shares in a company) agreed that there were profound differences between them. It was agreed that the taxpayer would resign as director and employee of the company. It was agreed between the parties to pay the taxpayer money for the sale of his shares and unpaid remuneration. The only amount paid was in respect of the shares and this was paid out of the employee benefit trust (EBT) as the EBT purchased the shares.

Due to financial difficulties, the EBT made a payment to the taxpayer two year after he resigned from the company.

The issue in this case dealt with the application of retirement relief – if the disposal occurred when the taxpayer left the company then retirement relief would apply; if the disposal occurred two years later then retirement relief would not apply.

The Special Commissioners decided that retirement relief applied on the sale of the shares. The key issue in the decision was that agreement to sell the shares was reached at the time of leaving the company and that agreement was not rescinded and replaced.

For further information, see page 41.

VAT and Duties Tribunals

Barclays Bank plc

This case deals with certain supplies made to the Appellant by a South African company. The Revenue had issued a determination that the supplies were a single supply of debt collection services so that the Appellant was liable to a reverse charge.

The issue in the appeal was whether the services supplied by the South African company to the Appellant in relation to customers with overdue Barclaycard accounts were exempt as “transactions, including negotiation, concerning... payments, debts” or as “the negotiation of credit”; or whether they were taxable as being within the exception for debt collection – the Sixth Directive had excluded debt collection from exempt financial services.

The South African company pursued outstanding payments in respect of the Appellant's accounts by telephone. The Appellant contended that the service was either the negotiation of debt or the negotiation of credit on the basis that the company was permitted to agree a repayment plan or re-age the debt, and hence exempt. The Revenue contended that service was the supply of debt collection.

The Tribunal found against the taxpayer/appellant. The services supplied by the South African company were in the form of debt collection – the essential aim of the South African company was the recovery and collection of debt. Hence, the services were excluded from exemption by virtue of the Sixth Directive.

For further information, see page 43.