European Court of Justice

Canterbury Hockey Club & Anor v R & C Commrs (Case C-253/07)

Under the Sixth VAT Directive, certain services closely linked to sport, supplied by a non-profit-making organisation to persons taking part in sport, are to be exempt from VAT.

In the judgement of Canterbury Hockey Club and Canterbury Ladies Hockey Club v The Commissioners for H.M. Revenue and Customs (C-253/07) which was delivered on 16 October, it was noted that to be eligible for that exemption, the services must satisfy three conditions:

• they must be supplied by a non-profit-making organisation;
• they must be closely linked and essential to sport; and
• the true beneficiaries of those services must be persons taking part in sport.

Supplies of services which do not meet those criteria, particularly those linked to sports clubs and to their operation such as, for example, advice about marketing and obtaining sponsors, cannot be exempted. Hence, the ECJ has ruled that services supplied to sports clubs may be exempt from VAT.

UK High Court (Chancery Division)

Dragonfly Consulting Ltd v R & C Commrs [2008] EWHC 2113 (Ch) IR35

This is an appeal by the taxpayer company against a decision of the Special Commissioners pursuant to what is generally known as the IR35 legislation whereby a contractor who provided his services through an intermediary company (taxpayer company) was found to have been regarded as an employee if he had engaged directly with the client.

The High Court found in favour of the Revenue by upholding the decision of the Special Commissioners. Key to this decision was that the performance of the contractor's duties was subject to a degree of supervision and quality control which went beyond merely directing him when and where to work.

Leisure Pass Group Ltd v R & C Commrs [2008] EWHC 2113 (Ch)

VAT – passes to tourist attractions

This is an appeal by the taxpayer company against a decision of the VAT and Duties Tribunal.

The taxpayer company sold a product which it called the London Pass, and which was aimed principally at the tourist market. A member of the public who had purchased a London Pass was able to enter a large number of venues or ‘attractions’ in or around the London area without having to pay for admission at the attraction itself for the period covered.

The basic issue was whether the taxpayer was liable to account to HMRC for VAT on the receipts which it obtained on sales of the Passes, or whether no VAT was payable at that stage because of a provision in the VAT Acts about ‘face-value vouchers’.

The High Court found in favour of HMRC by upholding the decision of the Tribunal that the taxpayer was liable to account for VAT on the sale of the Passes. The key issue in the decision was the definition of ‘face-value voucher’ – for the definition to apply, the Pass would have had to represent ‘a right to services to the value of an amount stated on it or recorded in it.’ The Pass did represent a right to services, but it was not a right to services to the value of an amount stated on it or recorded in it.

Special Commissioners

Executors of McArthur (dec'd) v R & C Commrs

Valuations – transactions immediately prior to death

The deceased was the senior partner of a firm of solicitors. The issue was the proper valuation of certain majority and minority shareholdings of the deceased in three private family companies. The issue was complicated by the fact that the deceased made loans to two of these companies prior to his death. The deceased could convert the amount of the loan into shares in the companies (he had not done so by the time of his death) – that disputed issue had a significant bearing on the value of the deceased's estate for Inheritance Tax purposes.

The Revenue issued notices of determination which included the shares he was entitled to acquire on the conversion of the loans.

The representatives for the deceased argued that the right to convert ended at the date of death and hence had no value.

The Special Commissioner found that there was no significant doubt that the loans and related conversion rights or options were granted and were valid, subsisting and enforceable immediately prior to the deceased's death. The key issue in the decision was that the valuation date of the property was the amount that it might reasonably be expected to fetch if sold in the open market immediately before the deceased's death.

Another point of note from the decision was the informal nature of the granting of the convertible loan stock – it was not necessary to have a written contract in order for the transaction to be valid.

Domain Dynamics (Holdings) Ltd v R & C Commrs

Enterprise investment relief

The taxpayer company issued ordinary shares to twelve persons. Some of the shares were issued in return for cash; some were issued in satisfaction of a fee due to the employee for the provision of a guarantee; and some were issued to convert certain loan notes into shares. Two of the recipients later realised a chargeable gain and wished to claim relief from capital gains tax on the original gain in respect of their re-investment in the shares of the company.

The Revenue argued that relief in respect of re-investment under the enterprise investment scheme was not available to the two recipients because all the shares comprised in the issue were not issued in order to raise money for the purpose of a qualifying business activity; some of the shares had been issued as consideration for the giving of the guarantee and some had been issued to convert the loan notes.

The Special Commissioner dismissed the appeal and hence disallowed the EIS relief. The reason for disallowing the relief was that the shares had not been issued in order to raise money for the taxpayer's trade and hence the conditions were not satisfied.

A lesson to be taken from this decision is to ensure that all conditions are followed to the letter of the law when availing of a particular tax relief.

Businessman v R & C Commrs

Awarding costs

This was a decision on HMRC's application for costs. On arriving at the start of the appeal the Special Commissioner was told that the taxpayer was withdrawing the appeal, having told the HMRC representative only a minute before. HMRC applied for costs on the basis that the taxpayer had acted wholly unreasonably.

The Special Commissioner awarded the Revenue their entire costs of and incidental to the appeal.

It was contended on the part of the taxpayer that there is nothing unreasonable in a party withdrawing when he realises that he will lose. Based on limited evidence from HMRC, the Special Commissioner concluded that the taxpayer was putting forward misleading evidence. It followed from this that it was more a question that the taxpayer was withdrawing because he realised that HRMC were likely to prove that his evidence did not stand up.

“Accordingly, even though the standard of acting wholly unreasonably is an exacting one, I am of the opinion that the Appellant has acted wholly unreasonably in connection with the hearing.”

Note: This decision was anonymised, the reason being because it was agreed that the hearing would be in private on the basis that the taxpayer was a wealthy man who said that threats had been made against his wife and children and he was concerned about the increased security risks if details of his life were given at a public hearing.

Guarantor v R & C Commrs

Personal guarantee – deductible employment expense?

The taxpayer was a director of a company, and held 5% of its issued shares. The company found itself in acute financial difficulty and later that year it entered into a debt factoring agreement with a commercial factor. It was a condition of the agreement that the directors entered into personal guarantees in amounts which were proportionate to their respective shareholdings, and only ended four months after the cessation of employment with the company. Following the taxpayer leaving the company, it failed and the taxpayer's guarantee was called upon.

In his tax return the taxpayer claimed a deduction for expenses of the aggregate amount he had paid. HMRC disallowed the deduction on the basis that the amount was not incurred wholly, exclusively and necessarily in the performance of the duties of the employment.

The Special Commissioner found against the taxpayer. A key issue in the decision was that the expense, as distinct from the contingent liability, was not incurred in the course of the taxpayer's employment, but only after it had come to an end, with the consequence that it could not be said that the expense was incurred in the course of the employment.

Taylor & Anor v R & C Commrs

Joint account at time of death

The deceased had put two building society accounts in joint names with her brother-in-law. On death of either account holder, the whole account would pass to the survivor. The deceased's will left all her property on trust for sale for the benefit of her sister and one of her nieces.

After the death, the surviving joint account holder closed the accounts. The money had been used for funeral expenses and the remaining money given to two nieces (for the benefit of their children) and a nephew – it had been the deceased husband's wish (who had pre-deceased her) that the nieces, their children and the nephew would benefit but there had been nothing but an expression of wishes. No inheritance tax was paid on the money in the accounts.

Revenue contended that the accounts were to be treated as beneficially owned by the deceased before her death. The appellants argued that the accounts had been held by the brother-in-law and that the deceased had been a trustee of the accounts.

The Special Commissioner held that the deceased had been beneficially entitled to the whole of the money at the date of death or alternatively the property should have been treated as a gift to her brother-in-law. The key issue in the decision was that the accounts had belonged entirely to the deceased after her husband's death. There was no evidence of any other position. As the deceased had been able to dispose of the whole balance, it followed that she was beneficially entitled to the whole of the amount in the accounts.

VAT and Duties Tribunals

University College London

University College London, through its Laboratory made zero-rated supplies of scientific equipment. This equipment was used for research into space. The Laboratory was treated as making zero-rated supplies in the course or furtherance of a business carried on by it when it exported equipment to the launch sites. In addition, the Laboratory donated equipment to other UK charities such as the Open University for export by them outside the Member States in order to be launched into space; these donations were treated as zero-rated.

As the supplies made by the University were zero-rated, it was common ground that the University was entitled to recover input tax that was directly attributable to these supplies. The issue arose whether the University was also entitled to recover input tax on its overhead costs to the extent that these overheads supported the zero-rated supplies of scientific equipment that the University made.

The First Appeal in relation to the above was listed for hearing in early April 2006. However, shortly before the hearing, the parties settled the appeal by agreement. Following this settlement, the University made further voluntary disclosures in respect of later VAT periods. The Revenue rejected the application of the settlement to later VAT periods. This appeal dealt with the application of the settlement to later periods. In addition, the university requested that a third appeal be consolidated with the second appeal.

The Tribunal found in favour of the taxpayer. The settlement agreement referred to a question of principle, and on this basis did form the basis for direction in the second appeal. In addition, it was decided that the second and third appeal should be consolidated.

This is an interesting decision for all taxpayers involved in making settlements with the Revenue; and the subsequent application of those settlements.

Honeyfone Ltd

The taxpayer company dealt in mobile phones. Among its transactions in mobile phones were a number of exports. It claimed repayment of its input VAT in relation to its purchase of the phones it exported. Those claims were denied by Revenue.

The Revenue's position was that each of the export transactions formed part of a chain of transactions which started with a ‘defaulting trader’ who had fraudulently defaulted in its obligation to pay VAT in respect of its supply of the phones, and that the phones then passed along a chain of ‘buffer traders’ each of whom bought and sold on the phones until they reached the Appellant, who exported them. Revenue were of the view that the taxpayer knew or should have known that with each of its purchases it was participating in a transaction connected with fraudulent evasion of VAT, and, as a result of the principles enunciated by the ECJ, it was therefore denied its right to deduct and reclaim input tax on its purchase of the phones. The taxpayer appealed.

The Tribunal allowed the appeal in part – where the trader at the start of the chain fraudulently defaulted in the payment of VAT and the taxpayer should have known that these transactions were linked to the fraudulent evasion of VAT, it was correct to deny input credit. In the other transactions, the VAT input credit should be allowed.

Camden Motors (Holdings) Ltd

The taxpayer's principal business activity was the sale of new and used cars, both fleet sales and sales to retail customers. In addition, the taxpayer acted as agent in the sale of finance and insurance products on behalf of third party suppliers. Fleet sales contributed to over 60% of the taxpayer's total turnover; whereas Commission sales (non-VATeable) amounted to 1% of sales. On this basis, the taxpayer rounded the amount of input tax that it was entitled to recover under the standard apportionment method up to 100% in accordance with Regulations.

Revenue contended that the taxpayer had used an excessive proportion of its input tax to the making of taxable supplies. Revenue were of the view that the input tax recoverable under the standard method differed substantially from an attribution based on use of goods and services.

The Tribunal found in favour of the taxpayer that the standard partial exemption method gave a fair result. The reason for this was that the standard partial exemption method used by the taxpayer did not differ substantially from one based on the extent to which the goods or services were used (in accordance with the Tribunal analysis) in making taxable supplies. The method proposed by the Revenue did not produce a result which fairly reflected the attribution of costs between taxable and exempt.