UK High Court (Chancery Division)

R & C Commrs v Tallington Lakes Ltd [2007] EWHC1955 (Ch)

VAT – supply of caravan pitches

This High Court case deals with the supply of caravan pitches and whether it is an exempt supply of land or standard-rated supply of pitch hire on a seasonal/holiday park.

The taxpayer operated a leisure complex and granted licences to owners of static caravans to occupy concrete pitches. The licences stipulated that the caravans could not be occupied during February.

The taxpayer argued that in reality the owners were not stopped from occupying their caravans all year round and that in some cases the caravans were used as principal private residences. Customs argued that the site was a seasonal/holiday park as opposed to a permanent residential park, and that the stipulation in the licence in relation to non-occupation in February supported this.

The High Court ruled in favour of Customs, that the supply of the annual caravan pitches subject to a prohibition on occupation during February was the supply of seasonal pitches and hence the granting of the licence was subject to VAT at the standard rate.

The non-occupation clause in February was not conclusive. However, the key issue in the decision related to the planning conditions applying to the site, which remained enforceable during the relevant period. As the planning condition prohibited occupation in February, all pitches were seasonal and hence subject to VAT at the standard rate.

For further information, see page 28.

Special Commissioners

Tower Mcashback LLP1 & Anor v R & C Commrs

Capital allowances

This Special Commissioner's decision deals with the quantification of capital allowances available in respect of a purchase of software, where the purchase was substantially funded by non-recourse loans indirectly made available by the vendor of the software.

The taxpayer had devised some clever and novel software that it believed would revolutionise the loyalty cards often promoted by food and drink producers and supermarkets, providing, as its reward to “customers”, free air-time on mobile phones.

The scheme adopted involved the creation of four LLPs. Each of the four LLPs was to purchase software related to taxpayer's system, the aggregate price for the purchase by all four LLPs being £143 million. With a view to the LLPs claiming 100% first year capital allowances for tax purposes, the four LLPs entered into contracts to buy discrete elements of software on 31 March 2004, on the basis that the purchases would be completed before the expiry of a four-month period. The contracts all envisaged that while the LLPs would pay the whole of the allocated slices of the £143 million total purchase price on completion, the taxpayer would procure that two banks would be interposed in a chain to provide the investing partners with non-recourse loans to fund 75% of their capital contributions to the LLPs, the taxpayer providing the ultimate security and all of the funding to those intermediate banks.

It was decided by the Special Commissioner that the only expenditure treated as incurred at the outset, and hence available for capital allowance purposes, was 25%. The key issue in the decision related to the totally non-commercial loans on quite extraordinary terms which had the effect of reversing much of the payment of the price and resulted in the price ostensibly paid by the LLPs greatly exceeded the value of the software.

For further information, see page 31.

Rose v Director of Assets Recovery Agency

Income tax – proceeds of crime

This case had been returned from the UK High Court to determine the quantum of undeclared profits.

By way of background, the taxpayer carried on an ironing business. Police searched the taxpayer's house and a small amount of controlled substance was found. Larger amounts of drugs were found in a separate garage.

The two issues that the Special Commissioner had to decide were:

• What was the value of the drugs and whether such value should be included for each of the years in question; and
• Whether the four cheques represented the proceeds of a one-off sale of jewellery by the taxpayer's wife as the taxpayer claimed or were the proceeds of part of a systematic dealing in jewellery such that an equivalent amount should be included for each of the years in question.

The Special Commissioner's answers were as follows:

• The value of the drugs was their street value of £11,500 and such value should be included for each of the years in question; and
• The four cheques represented the proceeds of a one- off sale of jewellery by the taxpayer's wife as the taxpayer claimed and were not the proceeds of part of a systematic dealing in jewellery. Consequently, an equivalent amount should not be included for each of the years in question.

For further information, see page 32.

Sokoya v R & C Commrs

Enquiry – closure

The taxpayer filed a tax return for 2004–05 on showing income of £4,650 from his employment and no other income.

By Notice to the taxpayer an officer stated his intention of enquiring into the Appellant's tax return for 2004–05 and made an informal request for certain information. Not having received the information, the officer issued a Notice under s 19A of the Taxes Management Act 1970

The taxpayer contended

• The Revenue had no power to enquire into items where there was no entry in the tax return.
• The officer did not reasonably require the information. It was an enquiry into his lifestyle, not into the tax return.
• The return was complete. He had ordered his affairs in a way so as not to pay any tax.

The question for the Special Commissioner was whether the production of the document or the furnishing of the accounts or particulars was reasonably required by the officer for the purpose of determining whether and, if so, the extent to which the return is incorrect or incomplete.

The Special Commissioner could see nothing unreasonable in any of the questions. The enquiry need not be limited to the entries in the return – the officer can require information to determine whether the return was incomplete. Since the taxpayer's income could not support his expenditure it seemed reasonable to the Special Commissioner that the Revenue should check his taxable income. Therefore, it was concluded that the questions were reasonably required for this purpose.

For further information, see page 33.

Vodafone 2 v R & C Commrs

CFC – compatibility with EC Treaty

This decision concerns the application by Vodafone 2 (the Applicant) dated 1 October 2004 for a closure notice. Reference to the European Court of Justice (ECJ) for a preliminary ruling concerning the compatibility of the UK legislation on controlled foreign companies (CFCs) to the EC Treaty was included in the original application.

The Registrar of the ECJ asked the Special Commissioners to inform him whether in the light of the judgment in Cadbury Schweppes they wished to maintain the reference in this application.

The Special Commissioners issue was to maintain the ECJ reference only if they were of the view that a further ruling of the ECJ was necessary to enable them to give judgment on this application.

It was their view that the ECJ in Cadbury Schweppes provided a general answer to the question, namely that the CFC legislation constitutes a restriction on freedom of establishment within the meaning of articles 43 EC and 48 EC, but that such a restriction can be justified if the CFC legislation makes it possible to thwart practices arising out of wholly artificial arrangements, which have no purpose other than to escape the tax normally due on the profits generated by activities carried on in the national territory and that it is a matter for the national court to decide whether the motive test can be interpreted to ascertain whether the CFC legislation applies in the case of a CFC established in a Member State only in a case where there are wholly artificial arrangements.

The Special Commissioners decided (by the Chairman's casting vote) that they should withdraw a reference to the ECJ but concluded that the CFC legislation was compatible with the EC Treaty. However, they also determined that a further hearing was required to decide if there were artificial arrangements evident in the present case.

For further information, see page 34.

Bryant v R & C Commrs

Closure notices

The taxpayer received a notice of enquiry into his tax return for the year to 5 April 2004. In addition he was requested to provide various documents and various items of information.

The taxpayer's tax advisors explained that due to the taxpayer's ill health they had been unable to obtain any further information from him. Revenue advised that unless the taxpayer produced the documents and information by 1 March 2006, Revenue would issue a closure notice to the enquiry; the net profits would be increased to £39,527.

Notice of appeal in relation to the closure notice was given by the taxpayer's tax advisors on behalf of the taxpayer. Following failure to receive additional requested information, they subsequently resigned from their appointment to act as his accountant and tax advisor.

The Special Commissioner dismissed the taxpayer's appeal. In making his decision, the Special Commissioner held that it was for the taxpayer to show that he had been overcharged by the amended assessment following the enquiry into his return; and his failure to make any contact with the Revenue following the resignation of his tax advisors meant that no further explanation had been given for the difference between the figures as originally shown in the return and those proposed by Revenue.

For further information, see page 35.

Shell UK Ltd v R&C Commrs

Petroleum revenue tax

This is an interesting Special Commissioners decision which deals with amendments to the terms of a contract and whether those amendments represent a new contract or the old contract still applies.

The Oil Taxation Act 1975 imposed a new tax (petroleum revenue tax) in respect of profits from oil won under the authority of licences under the Petroleum (Production) Act 1934. However, any gas sold to the British Gas Corporation under a contract made before the end of June 1975 is disregarded.

The taxpayer entered into a contract with British Gas on 27 June 1975. The contract had a fixed term of twenty years beginning with a first delivery date. The first delivery date was 1 November 1982 and so the term of the contract ended on 31 October 2002. Towards the end of 1999 the taxpayer and British Gas entered into negotiations about sales of gas after October 2002 and reached an agreement in March 2002. The 2002 agreement took the form of amendments to the 1975 contract; in particular, it changed the provisions about price and the quantities of gas to be sold and it extended the term of the contract from twenty to thirty years.

Taxpayer's case: argued that gas sold to British Gas after October 2002 was gas sold under the 1975 contract and so was exempt from petroleum revenue tax.

Revenue's case: argued that the purpose of the 1975 Act was to exempt from tax gas sold under contracts which were being negotiated at the time of the passing of the Act. In their view the 2002 agreement was not the same contract as the 1975 contract because its terms were fundamentally different; accordingly gas sold to British Gas after October 2002 was not gas sold under the 1975 contract and so was not exempt from petroleum revenue tax.

The Special Commissioner decided that gas sold to British Gas after October 2002 was not sold under a contract made before the end of June 1975 and so was not exempt from petroleum revenue tax. The key issue in the decision was the ordinary meaning of the words “a contract made before the end of June 1975”. In the Commissioners' view, the taxpayer's argument imported an artificially extended meaning for the simple expression “a contract made before the end of June 1975”.

For further information, see page 36.

Minto v R & C Commrs

Deemed Pension Payments

At the termination of the appellant's employment, his employer agreed to transfer the appellant's benefit under a PHI policy held by it, so that the benefit would continue and be held in the appellant's name. The issue for determination was whether the amounts to which the notices of assessment under appeal relate were properly chargeable under the Income and Corporation Taxes Act 1988 as a pension.

It was submitted for the Appellant, that the payments under the PHI policy represented instalments of capital, namely the discharge or liquidation of sums due under a settlement for a potential claim for damages.

The Special Commissioner dismissed the appeal on the grounds that there were no circumstances disclosed by the evidence which indicated that the payments under the PHI policy were capital in nature. According to the Special Commissioner, the payments were more aptly described as pension payments taxable under Schedule E.

For further information, see page 37.

Walker v R & C Commrs

Discovery assessment

This is a decision concerning the jurisdiction of the Special Commissioners. The appellant's primary case is that there was no “Discovery” and that in consequence an assessment should not have been raised.

The essential issue is whether the Special Commissioners have exclusive jurisdiction to hear all matters in this case or whether the “Discovery Point” should be decided in isolation by the General Commissioners.

It was noted that the Special Commissioners jurisdiction to hear a case is limited by Statute – there is no inherent jurisdiction, there is merely a statutory jurisdiction. It was found that there was no statutory jurisdiction for a separate hearing of the “Discovery Point” on its own, and so, the Special Commissioner concluded that the appeal should be heard by the Special Commissioners.

For further information, see page 38.

De Nemethy & Anor v R & C Commrs

Penalty on late payment of stamp duty

This is an appeal against the imposition of a penalty for the late stamping of a deed of transfer. There is no appeal against the liability to the imposition of Stamp Duty or its amount. It is an appeal solely against the penalty.

The issue in this case was whether the appellants had a reasonable excuse for stamping the transfer of land almost six years late and, if not, then the amount was excessive. This appeal is concerned with Stamp Duty on documents in relation to land transactions which were executed before the introduction of Stamp Duty Land Tax.

The legislation provides that “No penalty is payable if there is a reasonable excuse for the delay in presenting the instrument for stamping.” Reasonable excuse is not defined for these purposes. It was the appellants' view that the penalty was disproportionate and unfair as they did not have the financial resources to pay the Stamp Duty at the requisite time. As the appellants controlled the decision to buy the house or not, and stamp duty arose as a result of that purchase, it was decided that there was no reasonable excuse. The Special Commissioner found that on the particular facts of this case there was not a reasonable excuse for failing to pay the Stamp Duty on time, and, as there is no reasonable excuse, a penalty was payable.

During the hearing, it was accepted by the appellants that a penalty should be imposed but that it should be at a lower level. In relation to the whether the penalty was excessive, the following quote sums up the finding:

“I consider that given the period in excess of six years from the due date of stamping I consider that an ordinary reasonable person would think the penalty was within the range of penalty amounts that were not excessive.”

For further information, see page 39.

VAT and Duties Tribunals

Weight Watchers (UK) Ltd

This appeal concerns whether customers of the taxpayer, 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.

There was a detailed look at the workings of the taxpayer, in particular the first meeting and subsequent meetings:

Separate fees are charged at the initial meeting for registration and for attendance at that meeting. However, a customer cannot attend as a member without paying the registration fee, except when there is a special promotion, and cannot register without paying the meeting fee for that week. The Tribunal concluded that as a matter of contract and VAT law there is a single transaction at the first meeting for a consideration comprising both fees.

Each time the member attends a meeting thereafter there is a further transaction for a separate consideration. There is no contractual obligation to attend further meetings. No part of the further consideration is attributable to the handbook and insert which has already been supplied or to the other printed materials already supplied. That member already has the handbook and thus only attends to obtain the services provided at the further meeting and the further printed materials.

It was decided by the Tribunal that there were mixed supplies both at the first meeting and thereafter. It was observed that the apportionment would not however be the same since the zero-rated content of the initial meeting would be greater.

For further information, see page 40.

HBOS plc

The Appellant and its associated businesses provided credit facilities to customers by way of loans of various types, credit card facilities or overdraft.

The Appellant had an in-house recovery department which usually could deal with the sum due. About 10% of the situations proved difficult or complex. The Appellant did not consider it had the skills or resources available in-house in such situations to follow up recovery of the sums due. In such circumstances the Appellant would refer matters to one of its agents.

“Debt Negotiation Services” were defined within the agreement between the Appellant and the Agent as the management and action of impaired balances, where the purpose was to negotiate clearance of the outstanding amounts due for customers whose accounts were still open or had been closed by the Appellant. The Agent would typically renegotiate the terms on which credit was granted to the borrower with a view to maximising recoveries by the Appellant.

The agents collected and transmitted money collected to the Appellant and were remunerated by a commission on the sums recovered.

The Appellant argued that the agent granted credit on behalf of the Appellant, i.e. the services supplied by the agents to the Appellant were exempt. It was not a financial institution but in varying the contract and departing from the absolute legal position of the parties the agent granted credit on behalf of the Appellant.

The Revenue argued that the agents were not providing intermediary services since they were not bringing together persons who were seeking to obtain financial services and persons who provided these. The agent did not have as its aim bringing together debtor and creditor for the supply of financial services. In summary, the agent's aim was debt collection, and therefore, vatable.

The Tribunal held that the service supplied to the Appellant was a single supply of debt recovery-the Sixth Directive by its wording gave exemption to transactions and negotiations concerning debts but removed from that exemption ancillary negotiations and discussions which take place in the activity of debt collection itself, which was wholly removed from the exemption granted, i.e. the services were vatable.

For further information, see page 40.

Ahmed t/a New Touch

This case concerns the entitlement of a taxable person to claim as input tax amounts which he paid in good faith to a supplier who purported to charge him VAT when in fact the supplier was not registered for VAT.

The Appellant purchased goods from the supplier. The Appellant paid in cash the amounts invoiced for those goods, including the VAT charged in those invoices. The Appellant subsequently discovered from the Commissioners that although the supplier was registered for VAT purposes at the time the first two invoices were issued, the VAT registration of the supplier was then cancelled by the Commissioners. However, the supplier continued to issue invoices purporting to be VAT invoices, which the Appellant paid in good faith, having no knowledge of, or means of discovering, the changed VAT circumstances of the supplier until alerted to the situation by the Commissioners.

It was held by the commissioner that:

The initial two invoices

The Appellant had met all the requirements he needs to satisfy in order to be entitled to deduct the VAT as input tax.

The remaining invoices

The only way in which the taxpayer could claim a deduction for input tax was to satisfy specific evidential requirements. The Commissioner wanted documentary evidence to support the invoices once he knew that the invoices were possibly suspect, issued by a trader who could no longer be traced by the Commissioners. The Appellant was not able to produce such evidence.

It was determined that the commissioner could not exercise discretion where the Appellant did not keep proper records of the relevant transactions, or of the supplier. Therefore, it was held that the Revenue did not act unreasonably in denying input credit on the remaining credit.

For further information, see page 41.

Birkdale School, Sheffield

This appeal dealt with whether charges to parents for joining a fee refund scheme where pupils were unable to attend school fell within the exemption applicable to education. This appeal is being treated as a test case for all the independent schools operating fees refund schemes.

Since at least the 1920s, independent schools such as the appellant, Birkdale School, have been operating what they describe as refund schemes whereby parents are entitled to repayment of school fees in certain circumstances. And until now, HMRC have accepted that the charges paid by parents for joining such schemes have been part of the exempt supplies of education schools are making. But HMRC have now reviewed their position and concluded that such schemes are standard rated supplies in their own right.

The commissioners decided that whilst the scheme necessarily relates to the supply of education made by the school, it could not itself be described as a supply of education. Therefore, it was held that there were two separate supplies:

• supply of education, and
• a supply of the entitlement to the refund of school fees in prescribed circumstances.

For further information, see page 42.