European Court of Justice

Haderer v Flnanzamt Wilmerddorf (Cade C – 445/05)

VAT – Tuition

In this case the taxpayer worked in a freelance capacity in the area of adult education in Germany. The taxpayer had a number of contracts which emphasised that there was no employment relationship, within the meaning of that term under German employment law.

The German tax authority did not receive VAT returns in relation to the services supplied in the contract. The taxpayer argued that the services were exempt under the Sixth Directive.

The German Court decided that the services could not be exempt under the Sixth Directive because a natural person could not come under the meaning of “other organisations defined by the Member State concerned as having similar objects”, but it was unclear whether the services would be exempt as “tuition given privately by teachers and covering school or university education”.

In the ECJ, it was held that in order to be exempt the services had to be given privately by the taxpayer AND the service had to cover school or university education. In the second requirement, the ECJ ruled that the activities of the taxpayer could be exempted under the Sixth Directive only where the tuition was given by the taxpayer (teacher) on his own account and at his own risk.

The decision was returned to the German Court to verify if this was the case.

For further information, see page 16

Stichting Regional Opleidingen Centrum Noord-Kennemeruind/Wedt-Frieduind (Horizon College) v Staatddecretarid van Financien (Cade C-434/05)

VAT – Provision of Teachers

This is another ECJ case which dealt with education, this time whether the provision of teachers by one educational establishment to another was exempt under the Sixth Directive.

The taxpayer was an “educational establishment” in the Netherlands. It made some of its teachers available to other educational establishments, with a tri-partite contract between the taxpayer, the teacher and the other educational establishment. The teacher's salary continued to be paid by the taxpayer but the other educational establishment reimbursed the taxpayer. The taxpayer did not charge VAT on the basis that the services were exempt under the Sixth Directive.

The ECJ decided that the provision of a teacher did not fall within the meaning of “children's or young people's education, school or university education, vocational or retraining”. However, it might be exempt if it fell within the meaning of a supply of services “closely related” to education. The supply of a teacher from one educational establishment to another to carry out teaching duties was an activity which could be described as a supply of services closely related to education. However, certain conditions must be met before the supply was exempt.

This decision was returned to the Dutch National Court to decide on the various conditions.

For further information, see page 17

Ludwig v Finanzamt Luckenwalde (Cade C-453/05)

VAT – Negotiation of Credit

The taxpayer was a self-employed financial advisor. DVAG made available to private persons a range of financial products through the taxpayer. The taxpayer was a subagent of DVAG.

The taxpayer canvassed potential clients in the name of DVAG. If the client indicated that he was in favour of the credit facility, the taxpayer arranged for the client to sign the contractual offer, which was then sent to the lender. The lender paid a commission to DVAG; and DVAG then paid the taxpayer in his capacity as subagent. The taxpayer argued that the payment from DVAG should not be subject to VAT on the basis that the service was exempt.

The ECJ held that the service supplied by the taxpayer may be treated as a negotiation of credit (which was exempt under the Sixth Directive) provided the negotiation of credit was the principal service provided by the taxpayer and the provision of financial advice was ancillary. As the services were only remunerated by the lenders on condition that the clients entered into a credit agreement suggested that the negotiation should be regarded as the principal service and the giving of advice as ancillary.

The ECJ ruled that it was for the national courts to decide on this particular issue.

For further information, see page 19

Hutch mo n 3G UK Ltd c3 Ord v C c3′ E Coinmrd (Cade C-369/04)

VAT – Granting of 3G Licences

See Section 1.39 of the August 2007 edition of tax. point for commentary on this case.

For further information, see page 20

UK House of Lords

Jones v Garnett (HMIT) [2007] UKHL 35

Settlements

See Section 1.23 of the August edition of tax. point for commentary on this case.

For further information, see page 21

Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v IR Commrs & Anor [2007] UKHL 34

ACT – Claim for Interest on Tax Overpaid

This case deals with the fallout from the recent ECJ decision (Metallgesellschaft Ltd v IR Commrs; Hoechst UK Ltd v IR Commrs – joined cases C-397/98 and C-410/98) on the breach of EU law by the imposition of ACT on non-residents but not on UK residents. The ECJ ruled that the amount of compensation was to be determined by the National Court.

The taxpayer claimed that it was due restitution and the amount due should include compound interest, whereas the Revenue argued that the payment should be simple interest.

The House of Lords ruled in favour of the taxpayer. The key issue in the decision is highlighted in the following quote:

• “We live in a world where interest payments for the use of money are calculated on a compound basis. Money is not available commercially on simple interest terms. This is the daily experience of everyone, whether borrowing money on overdrafts or credit cards or mortgages or shopping around for the best rates when depositing savings with banks or building societies. If the law is to achieve a fair and just outcome when assessing financial loss it must recognise and give effect to this reality.”

–Lord Nicholls of Birkenhead

For further information, see page 22

UK Court of Appeal (Civil Division)

BUPA Purchasing Ltd & Ors v R & C Commrs [2007] EWCA Civ 542

VAT – Assessments

BUPA Purchasing Ltd was a member of a group of companies that were leading national suppliers of private medical, health care and hospital services. Most of the supplies that it made were exempt supplies, i.e. supplies on which VAT was not charged. As a result, most of the input tax that the group had to pay when it purchased goods or services was not recoverable.

In the early 1990s, the group entered into a scheme (known as “the group exit scheme”), which was designed to enable the taxpayer to recover the input tax attributable to large purchases of supplies from outside suppliers.

Pursuant to the scheme, the taxpayer submitted sixteen monthly VAT returns for the periods from April 1995 to July 1996. The Commissioners took the view that the returns were wrong. They sought to correct the position by making assessments. However, the Commissioners erroneously made their assessments only on input tax grounds instead of partly on input and partly on output tax grounds.

The Court found in favour of the Commissioners. The VAT Act did not prevent the Commissioners from deducting underdeclared output tax in respect of the same transactions as formed the basis of the assessment which had not previously been taken into account, when, following the making of an assessment, they decided to accept that additional input tax was deductible.

The following is a quote from the case which provides the reasons for the decision:

1. As a matter of interpretation, it is an essential part of an assessment for the purposes of s 73(1) that it determines the net amount due by way of VAT;
2. As a matter of statutory interpretation, the statutory consequences as to alteration which apply to an assessment under s 73(1) do not apply to the reasons for an assessment which must be given by the Commissioners;
3. The Commissioners have power to reduce an assessment, and it must thus follow that when they reduce an assessment they have power under VATA to change the calculation as to input tax or output tax on which the assessment was based;
4. To hold that the Commissioners could only reduce an assessment with respect to either output tax or input tax, rather than by output tax or input tax (as the case may be) less any offset, or that the Commissioners could only make adjustments to input and output tax if they were exercising their power to reduce an assessment, is inconsistent with the intention of Parliament appearing from the power to make assessments to the best of their judgment;
5. It is not an objection to the alteration of the input tax and output tax components of an assessment that both would require amendment, and, in so far as Ridgeon's Bulk decides otherwise, it should be overruled.”

For further information, see page 26

Maco Door & Window Hardware (UK) Ltd v R & C Commrs [2007] EWCA Civ 545

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—…
   1. 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;
   2. for the purposes of a trade which consists in the storage—”
   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) above 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.

For further information, see page 28

WHA Ltd & Anor v R & C Commrs [2007] EWCA Civ 728

VAT–Abusive Practice

This UK Court of Appeal case considers a scheme which was claimed to have the effect of minimising overall liability to VAT in the context of the supply of repairs and parts provided pursuant to contracts of motor breakdown insurance. The scheme allowed one of the taxpayer companies to recover input tax on the supply of the garage services and parts while not charging output tax on further supply to the other taxpayer company as this supply related to exempt insurance services.

Following on from the Halifax decision in the ECJ (Case C-255/02), it was held that the scheme was an abusive practice under EU Community law because its aim was to obtain a tax advantage contrary to the provisions of the Sixth Directive. The two key issues in the decision were:

• fiscal neutrality requires that the supplier of exempt insurance services cannot recover input tax attributable to those services; and as such input tax was recoverable as a result of the scheme, it was contrary to the Sixth Directive, and
• the sole purpose of the scheme was to obtain a tax advantage. If there had been genuine commercial purpose then the scheme would have succeeded.

For further information, see page 29

UK High Court: Chancery Division

R & C Commrs v Church of Scientology Religious Education College Inc [2007] EWHC 1329 (Ch)

VAT – Time Allowed for Appeal

In this case, Customs applied for an extension of time to appeal against a decision of the VAT and Duties Tribunal. The VAT and Duties Tribunal had given two decisions: one on 21 July 2006 and another on 13 September 2006 to correct the previous decision. According to Customs, it is became aware of the decision on 2 February 2007 and filed their appeal on 30 March 2007, i.e. it is within the 56 day time limit.

The High Court decided to disallow the extension of time to appeal the VAT and Duties Tribunal decision as there was not proper justification for the delay in making the appeal to treat this case as exceptional.

For further information, see page 30

Momin & Ors v R & C Commrs [2007] EWHC 1400 (Ch)

Partnership Income

The taxpayers were partners in a restaurant. The Revenue commenced an investigation into their business and discovered that the taxpayers had suppressed their income. The Revenue issued assessments in relation to the loss of tax.

The taxpayer appealed against the validity of the assessments on the grounds that the assessments were not supported by a bona fide discovery of loss of tax and alternatively, that the quantum of the assessments was excessive and not supported by the evidence relied on by HMRC.

The General Commissioners found that HMRC had exercised due care and diligence and had made a bona fide discovery of loss of tax and that therefore the assessments were valid. They also found that there had been a suppression of income by the appellants. On the basis of revised calculations proposed by HMRC, they found that the assessments were excessive in amount but not such as to invalidate the assessments.

In the High Court it was held that there was no error of law by the General Commissioners and there existed a proper basis in the evidence for their findings and decision.

• “This is in my judgment an appeal without merit, involving an assertion of lack of good faith against HMRC in circumstances where HMRC has been severely hampered by the untruthful assertions of the appellants and by their failure to provide any records of their partnership income.”

For further information, see page 31

Midlands Co-Operative Society Ltd v R & C Commrs [2007] EWHC 1432 (Ch)

VAT – Industrial and Provident Society

In this UK High Court case, the taxpayer, an industrial and provident society, took over the stock, property and other assets and all engagements of another industrial and provident society, including the business of a motor dealer. The taxpayer identified the overdeclaration of output tax and submitted voluntary disclosures to Customs. Customs refused to pay the tax claimed.

The key issue related to whether there was provision in European or UK domestic law to allow the right to reclaim an overpayment of VAT to be transferred to the taxpayer.

The High Court ruled that the taxpayer was entitled to make a claim for repayment of VAT where the benefit had been transferred to it along with all the assets and engagements of the other society. The basis for the decision was that there was nothing in the statutory code which expressly prohibited, or necessarily implied the prohibition of, the passing of the benefit of the claim to another.

For further information, see page 32

R & C Commrs v Household Estate Agents Ltd

Employee Benefit Trust

The taxpayer had contributed £60,000 to an employee benefit trust in 1999 and had deducted this amount in computing its trading profits.

Following the House of Lords decision in Macdonald v Dextra Accessories Ltd [2005] BTC 355, it was accepted that the deduction was disallowed. Revenue issued a “discovery assessment”.

The taxpayer argued that the Revenue could not make a discovery assessment on two grounds:

• the assessment was not made in the circumstances specified in the relevant legislation, i.e. a company had delivered a company tax return, and empowered HMRC to made a discovery assessment if at the time when they ceased to be entitled to give a notice of enquiry into the return (which in the present case is agreed to be 31 December 2001) they could not have been reasonably expected, on the basis of the information made available to them before that time, to be aware of the relevant situation mentioned in the relevant legislation, and
• the assessment was also precluded as it was attributable to a mistake in the return as to the basis on which the company's liability ought to have been computed, and the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made.

There was minimal consideration of the “practice generally prevailing at the time”, with the Judge concluding that the onus was on the taxpayer to show that the deduction of the contribution to the employee benefit trust was allowable in accordance with practice at the time. The taxpayer had not considered this point in detail and the judge decided not to return the case to the Special Commissioners to consider the point further. The High Court ruled accordingly that the Revenue were not precluded from making a discovery assessment because it would have been reasonable for the inspector to initiate an inquiry into the taxpayer's tax return to reveal the true facts.

One cannot help but think of the decision in Munro v R & C Commrs [2007] EWHC 114 (Ch) (see ICAI Case Commentary in the April 2007 edition of tax.point), where a taxpayer overpaid capital gains tax by £846,000 as a result of calculating his gain pre Mansworth (HMIT) v Jelley [2003] BTC 3. His restitutionary claim was rejected on the grounds of time, as it had been accepted by both sides that the return had been based on the practice prevailing at the time – the Mansworth v Jelley case occurred after this time. Could the same not be said in the current case – the practice prevailing at the time was pre-Dextra? Unfortunately, as neither case considered the true construction of “practice prevailing at the time”, it is not possible to compare this decision with the decision in Munro, so we are left wondering …

For further information, see page 33

Mobile Export 365 Ltd & Anor v R & C Commrs [2007] EWHC 1737 (Ch)

VAT – MTIC Fraud

This case deals with the entitlement to recover VAT where the taxpayers were connected to a scheme to defraud Revenue. The case arose out of the missing trader intra Community (“MTIC”) VAT fraud.

Revenue refused to repay the input tax on the basis that the taxpayers knew or should have known that the transactions were connected to fraud. The taxpayers claimed that it was impossible to get a fair hearing on the grounds that the Revenue did not comply with the Tribunal rules in relation to lists and disclosure documents.

The Court upheld the VAT Tribunal's decision refusing to enter judgment for the taxpayers as it was clear to the Court that the Tribunal (which had the benefit of a clear understanding of the factual and legal context) in its decision fully and carefully examined its merits and rejected it as wanting.

For further information, see page 34

Scottish Court of Session

DCM (Optical Holdings) Ltd v R & C Commrs [2007] CSIH 58

VAT

This Scottish Court of Session case deals with the issue of the refusal by the VAT Tribunal to consider whether the taxpayer was entitled to use a particular partial exemption method for calculating deductible and nondeductible VAT.

The Court ruled that the decision should be remitted to the VAT Tribunal on the basis that the Tribunal had full jurisdiction to decide on the issue – while the tribunal had no power in itself to devise a special method and impose it on the party, the tribunal could indicate identified modifications and approve a method so modified.

For further information, see page 36

Special Commissioners

Carter Lauren Construction Ltd v R & C Commrs

CIS – Refusal of Certificate

This case relates to a second appeal by the taxpayer against the refusal by the Revenue to issue a CIS5 certificate.

The taxpayer had applied for a certificate and had been refused. The taxpayer appealed to the General Commissioners. The taxpayer had admitted before the General Commissioners 35 defaults in the delay in payment of PAYE and NICs and in submitting end-of-year PAYE and NIC returns in the three year qualifying period. The Commissioners dismissed the appeal on the grounds that they were not satisfied that the 35 admitted defaults were minor and technical.

The taxpayer then applied for another CIS5 certificate. When this was refused, it appealed to the Special Commissioners on the basis that the failures were minor and technical; and the refusal was a breach of human rights as another company in similar circumstances had been granted a certificate. The Revenue argued that the taxpayer was estopped from raising certain issues on the grounds that they had been raised before in another appeal.

In this preliminary hearing, the Special Commissioner decided that the second appeal should not be dismissed as it was not an abuse of process – the taxpayer was estopped from denying the failures which were admitted before the General Commissioners but it could argue that the 29 defaults in the second appeal were minor and technical.

For further information, see page 37

Gould & Anor (t/a Garry's Private Hire) v R & C Commrs

Closure Notice – Investigation not Complete

The taxpayer was a taxi firm with contract customers and members of the public. An enquiry commenced by notice of 17 November 2005. The taxpayer applied for a direction to issue a closure notice. However, there was a number of items of information outstanding at that time.

The taxpayer argued that the enquiry had been ongoing for 16 months and that the enquiries about personal expenditure were unnecessary and contrary to the right to respect private and family life in accordance with the European Convention on Human Rights.

The Special Commissioner decided that it was not appropriate to order a closure notice as the tax inspector was not yet in a position to make a judgement on the tax due. The taxpayer's human rights were not infringed in the investigation – it was the Special Commissioner's view that if the taxpayer had kept better records such an investigation would not have been necessary.

For further information, see page 38

Smith & Ors v R & C Commrs

Inheritance Tax – Life Assurance Policies

The deceased and his spouse took out life assurance policies in favour of their three children, together with a guaranteed temporary annuity. The key issue was whether the deceased made a transfer of value to his children when he took out the policies.

The Special Commissioner decided that there was a transfer of value when the policies were taken out.

The key issue in this decision was that the purchase of annuities and the making of life assurance policies were ‘associated operations’, i.e. they were each made with reference to the other, with a view to enabling the other to be effected, or with a view to facilitating the other being effected.

For further information, see page 39

Herman & Anor v R & C Commrs

Settlements

The taxpayers were a husband and wife. In 1990 the husband created a non-resident settlement of which he and his family were beneficiaries (family settlement). In 1998 the husband created a UK resident settlement of which he and his wife were beneficiaries and trustees – a solicitor was a third trustee (personal settlement).

In March 2002, the trustees of the personal settlement appointed all of the trust assets to the husband and wife. The assets had been appointed from the family settlement.

The key issue was whether to treat the husband and wife as having received capital payments from the family settlement indirectly. The Special Commissioner decided that the amounts transferred to the husband and wife from the personal settlement were received indirectly from the trustees of the family trust. The decision followed the flow of funds and concluded that the outcome was the release of the funds originating from the family settlement to the husband and wife absolutely.

The result of this decision was that the trust gains in the family settlement were to be treated as chargeable gains of the husband and wife on the basis that they had received capital payments (indirectly) from the family settlement.

For further information, see page 41

VAT and Duties Tribunals

Telent plc

The issue in this tribunal was whether services of a firm of solicitors in connection with a corporate restructuring exercise were supplied to the appellant company as well as to the solicitors’ own clients.

The appellant was being refinanced. Clifford Chance LLP were the third-party solicitors. The appellant paid for the legal services provided by Clifford Chance and appealed against Customs refusal to refund, as input tax, the VAT paid on those supplies. The key question for the tribunal was the capacity for VAT purposes in which Clifford Chance took part in the events.

The tribunal dismissed the taxpayer's appeal. The tribunal's conclusion is based on the following:

• There was no contractual or other legal basis on which Clifford Chance made, or was obliged to make, supplies of any nature to the taxpayer as part of the refinancing.
• On the facts, Clifford Chance did not for the purposes of VAT supply any services to the taxpayer as part of the refinancing. Notwithstanding that the taxpayer derived benefits from the supplies made by Clifford Chance to its clients, those benefits were not supplied to it by Clifford Chance.
• There was therefore nothing supplied by reference to which the payments by the taxpayer to Clifford Chance could be regarded for VAT purposes as consideration.

For further information, see page 42