UK HOUSE OF LORDS

Maco Door & Window Hardware (UK) Ltd v R & C Commrs [2008] UKHL54

Industrial buildings allowance — warehouse for storage

The taxpayer carried on the activity of storage and wholesale of products which are manufactured by the taxpayer's parent outside the UK. The case revolves around the meaning of specific legislation in the UK-section 18 of the Capital Allowances Act 1990-which provides:

1. Subject to the provisions of this section, in this Part “industrial building or structure” means a building or structure in use—
   (e) for the purposes of a trade which consists in the manufacture of goods or materials or the subjection of goods or materials to any process;
   (f) for the purposes of a trade which consists in the storage—
   1. 1. of goods or materials which are to be used in the manufacture of other goods or materials;. ..
      2. of goods or materials which are to be subjected, in the course of a trade, to any process; or
      3. of goods or materials, which, having been manufactured or produced or subjected, in the course of a trade, to any process, have not yet been delivered to any purchaser; or...
2. The provisions of subsection (1) a bove shall apply in relation to a part of a trade or undertaking as they apply in relation to a trade or undertaking except that where part only of a trade or undertaking complies with the conditions set out in subsection (1), a building or structure shall not by virtue of this subsection be an industrial building or structure unless it is in use for the purposes of that part of that trade or undertaking.”

The taxpayer argued that the storage facilities were industrial buildings and hence industrial buildings allowance should be available. The Special Commissioner found in favour of the taxpayer. However the UK High Court found against the taxpayer.

In the Court of Appeal, the case was decided in favour of the taxpayer; but with one dissenting judge. The key issue related to whether storage was part of the taxpayer's trade, or not.

• The two assenting judges concluded that the taxpayer was entitled to industrial buildings allowances in respect of the warehouse since the building was used for storage and storage was part of the taxpayer's trade and the products stored in the warehouse were goods or materials to be used in the manufacture of other goods or materials.
• The dissenting judge concluded that the taxpayer's trade did not qualify and that the storage of its goods was not part of the trade but part of its modus operandi.

The House of Lords found against the taxpayer (one dissenting), in that the taxpayer was not entitled to industrial buildings allowances in respect of a warehouse with office and lecture room facilities since the storage of goods was carried out to support the taxpayer's trading operation and was not a trading activity in itself. The key issue was that the taxpayer was storing and selling goods which were its own property. Its trade was not storage. It was that of a merchant, buying goods and selling them on at a profit.

For further information, see page 39.

UK High Court (Chancery Division)

Prudential plc v R & C Commrs [2008] EWHC 1839 (Ch)

Deduction of swap transaction expenses

The taxpayer was exposed to two foreign exchange liabilities which it wished to ‘hedge’. In its corporation tax self assessment return the taxpayer sought to deduct from its profits the aggregate of the sums paid in connection with two swaps. HMRC rejected the claim of the taxpayer on three grounds:

1. neither sum came within the definition of a qualifying payment,
2. neither sum had been allocated to a period in the manner required by the legislation, and
3. neither sum was eligible for inclusion as it was referable to a tax avoidance purpose and so excluded from the computation by the legislation.

The High Court found in favour of HMRC that the payments made at the inception of the two swaps were not qualifying payments eligible for deduction in calculating the taxpayer's corporation tax liability. In the judge's view there were two questions:

1. what was meant by the phrase “in consideration of another person's entering into the contract” when used relevant legislation? and
2. did the front end payments come within that description?

The relevant distinction was between payments of principal for the currency and payments made to a counterparty to induce it to enter into a contract for the sale or exchange of the currency. The payments in this case were payments of principal for the currency and hence not qualifying payments, and so could not be deducted.

For further information, see page 40.

VAT and Duties Tribunals

LA Leisure Ltd

The appeal concerned whether a claim made by the Appellant for overpaid output tax made on 31 May 2007 was out of time to the extent that it related to VAT overpaid in the period ending April 2004. HMRC contended that the claim must be made within three years of the end of the relevant accounting period and the Appellant's claim did not meet this condition.

It was decided that the claim made by the Appellant for overpaid output tax made on 31 May 2007 was out of time in that it related to VAT overpaid in the period ending April 2004. The Appellant's time limit expired on 30 April 2007 being three years after the end of the prescribed accounting period.

The Appellant had sought to disapply the three year rule on the principles of equivalence or equal treatment (the time limits for claiming an overpayment should be the same as underpayment); or effectiveness (it was against EU law to curtail the time limt for making repayment claims from three years commencing on the date of payment to three years from the end of the accounting period-there were no transitional provisions). These arguments were rejected by the Tribunal -

Equivalence or equal treatment

This is interesting and applicable to the position in relation to Irish tax. It was disappointing but not unexpected that the Tribunal found that it was appropriate to treat input tax and output tax differently and that such different treatment did not offend the principle of equivalence.

Effectiveness

The Tribunal found that the absence of the transitional period did not contravene the principle of effectiveness. The purpose of the changes was to ensure equality between repayment traders and payment traders in respect of the defence of unjust enrichment; and there was no need for a transitional period because there was no directly effective right to be unjustly enriched.

For further information, see page 41.

Olympia Technology Ltd

This is an appeal by the taxpayer against two decision letters from HMRC refusing to repay input tax of a total of £1,618,473.68. The reason given was that the taxpayer ought to have known it was involved in MTIC [Missing Trader Intra-Community (fraud)] transactions.

In Optigen, Cases 354/03, 355/03, the ECJ made it clear that the right to a VAT refund was not to be taken away by reference to transactions elsewhere in a chain of transactions involving MTIC unless the taxpayer knew or had the means of knowing about the fraud.

In this decision, the taxpayer's appeal was allowed:

• in relation to the straight deals it could not be said that the taxpayer ought to have known of fraud in the transaction chains; and
• the question of whether the taxpayer knew about the contra-trading deals did not arise.

Having reviewed all the evidence, the tribunal concluded that the taxpayer's director had limited experience to have known that there was a fraud in the deal chains.

For further information, see page 42.

Institute of Bio medical Science

In this appeal, the Tribunal was asked to adjudicate on the proportion of the Appellant's subscription fee income which should be treated as representing VATable supplies by it.

The Institute of Biomedical Sciences is the professional body for biomedical scientists in the UK. It was founded in 1912 and has some 16,000 members mainly employed in the National Health Service, medical laboratories, the National Blood Authority and other such bodies. The adjudication was required in the context of the Appellant's right to recover that fraction of its residual input tax which was its taxable outputs divided by its total outputs.

The following is a Revenue concession:

“Where a membership body supplies in return for its membership subscription, a principal benefit together with one or more ancillary benefits, it will normally have to treat the subscription as being in return for that principal benefit. This means that the body will have to ignore the liability to VAT of the ancillary benefits and account for VAT on the whole subscription based on the liability to VAT of that principal benefit.

“However bodies that are non-profit making and supply a mixture of zero-rated exempt and/or standard rated benefits to their members in return for their subscription, may apportion such subscriptions to reflect the value and VAT liability of those individual benefits without regard to whether there is one principal benefit. This concession may not be used for the purposes of avoidance.”

The Institute provided the following benefits to its members without charge other than the membership subscription:

1. representation and lobbying in relation to the interests of those working in biomedical science;
2. the procuring for the members of the Institute of the delivery of monthly copies of the Biomedical Scientist (“the Gazette”) and quarterly copies of the British Journal of Biomedical Science (“the Journal”);
3. access to the members’ section of the Institute's website; etc

Until about 2001 the Institute had published the Gazette and the Journal itself: it commissioned articles and conducted the editing of the magazine, sold advertising space, and paid for its printing and distribution. In September 2001 the publication of the Gazette was transferred to a publisher, and in January 2002 that of the Journal was transferred to the publisher who agreed to pay 20% of its net profit to the Institute.

The Appellant contended that the major benefit of membership for most members was the receipt of the Gazette and hence the majority of the membership subscription was treated as relating to it. The Revenue argued that the costs of the Gazette were not the costs of the appellant.

The Tribunal found that the Revenue's apportionment method was not so wrong as to have to use the appellant's method.

For further information, see page 43.

The Chancellor, Masters and Scholars of the University of Cambridge

This is an appeal by the University of Cambridge against a decision of the HMRC to refuse to allow the Appellant to issue a certificate entitling it to pay a reduced rate of VAT on supplies of electricity.

The Appellant contended that as a charity it was entitled to pay the reduced rate of VAT on electricity supplies made to it if it uses the electricity “otherwise than in the course or furtherance of a business”. Revenue contended that the Appellant was not a body governed by public law.

The Tribunal found that the Appellant was not a body governed by public law and even if it was, it did not engage as a public authority in providing higher education.

For further information, see page 44.