European Court of Justice

Nordania Finans A/S & Anor v Skatteministeriet (Case C-98/07)

VAT – leasing of motor vehicles

In the period in question, the Group operated a business involving the financial leasing of cars, which was liable to VAT. The Group also had a business involving the provision of financial services, which was VAT-exempt.

It had to calculate a proportion in order to establish the amount to which the partial deductibility of VAT on its overall costs related. For the purpose of that calculation, it took into consideration the turnover from the sale of the vehicles upon termination of the respective lease contracts. It took the view that those vehicles were not ‘capital goods used by the taxable person for the purposes of his business’ within the meaning of Article 19(2) of the Sixth Directive. The Danish local tax authorities objected to that assessment, taking the view that the vehicles did constitute such goods and that the turnover from the sale of those vehicles could therefore not be taken into consideration in the calculation of that proportion.

The Danish Supreme Court referred the following question to the ECJ:

“Is the expression “capital goods used by the taxable person for the purposes of his business” contained in Article 19(2) of the Sixth Directive … to be interpreted as covering goods which a leasing undertaking purchases with a view to both leasing and resale upon termination of the respective leasing contracts?”

The ECJ held that “capital goods used by the taxable person for the purposes of his business” did not include vehicles which a leasing undertaking purchases with a view, as in the case in the main proceedings, to leasing them and subsequently selling them upon termination of the respective leasing contracts. The reason for this decision was that the sale of such vehicles at the end of those contracts was an integral part of the usual business activities of that undertaking.

For further information, see page 23.

Securenta Gottinger Immobilienanlagen und Vermogensmanagement AG v Finanzamt Gottingen (Case C-437/06)

VAT – economic and non-economic activity

The taxpayer's activities involved acquiring, managing and selling real estate, securities, financial holdings and investments of all types. It acquired the capital necessary for this by means of the issue of shares and atypical silent partnerships.

The taxpayer's taxable transactions amounted to about a third of its turnover. The majority of its input VAT was not attributable to specific output transactions. The taxpayer's position was that, as all the input VAT paid related to expenditure connected with the acquisition of new capital, it was deductible on the ground that the issue of shares was linked to the reinforcement of the company's capital and that transaction had benefited the company's economic activity in general. The Revenue Authority refused deduction of the input tax relating to expenditure connected with the issue of atypical silent partnerships, as well as the input tax relating to expenditure connected with leasing transactions.

The following questions were referred to the ECJ:

1. “If a taxable person simultaneously engages in a business activity and a private activity, is the entitlement to deduct input [VAT] determined according to the proportion of assessable and taxable transactions, on the one hand, to assessable and exempt transactions, on the other hand, or is the deduction of tax allowed only to the extent that the expenditure connected with the issue of shares and silent partnerships is to be attributed to the applicant's economic activity within the meaning of Article 2(1) of [the Sixth] Directive … ?
2. If the deduction of input [VAT paid] is allowed only to the extent that the expenditure connected with the issue of shares and silent partnerships is to be attributed to the applicant's economic activity, should the apportionment of the input tax between business activity and private activity be carried out according to an “investment formula” or is a “transaction formula”, applying Article 17(5) of [the Sixth] Directive … mutatis mutandis, also appropriate?”

The ECJ ruled that where a taxpayer simultaneously carried out economic activities, taxed or exempt, and non-economic activities outside the scope of the Sixth Directive, deduction of the VAT relating to expenditure connected with the issue of shares and atypical silent partnerships was allowed only to the extent that that expenditure is attributable to the taxpayer's economic activity. In addition, it was held that the determination of the methods and criteria for apportioning input VAT between economic and non-economic activities is at the discretion of the Member States provided they have regard to the aims and broad logic of the Directive.

For further information, see page 26.

Finanzamt Oschatz v Zweckverband zur

Trinkwasserversorgung und Abwasserbeseitigung Torgau-Westelbien (Case C-442/05)

VAT – supply of water

The taxapayer ensured the supply of drinking water and disposal of sewage on behalf of a number of towns and municipalities. Accordingly, the activities of the taxpayer include the collection, piping, treatment and supply of drinking water to its customers, i.e. the owners of buildings connected to the water supply network. In that context, it laid mains connections at the request of its customers, for which it received a single fee corresponding to the cost of that work. The connection remained the property of the taxpayer.

The key issue was whether the laying of a connection was distinct from the supply of water; or the supply of water and the laying of the mains connection constituted a single service of ‘water supply’.

The following question was referred to the ECJ:

“Does connection of the water distribution network to a property owner's installation (the so-called “household connection”) by a water supply undertaking for a separately calculated fee come under the heading of [“the supply of water^”/^“water supplies”] within the meaning of [the] Sixth … Directive …(Annex D, point 2, and Annex H, Category 2)?”

The Sixth Directive does not define the concept of water supply.

It was held that the laying of a mains connection which consisted of the installation of piping permitting the connection of a building's water system to the fixed water supply network formed part of water supplies. The main reason for the decision was that since a mains connection was essential in order to make water available to the public, the view should accordingly be taken that such a connection also formed part of the water supplies.

For further information, see page 27.

Marks & Spencer v C & E Commrs (Case C-309/06)

VAT – tea cakes

From April 1973 to October 1994, the UK Revenue took the view that chocolate-covered teacakes were biscuits not cakes and accordingly they had to be taxed at the standard rate of VAT. By letter of 30 September 1994, the Revenue acknowledged that the teacakes were in fact cakes and subject as such to VAT at the zero rate.

Marks & Spencer thus paid a tax which was not due. On this basis Marks & Spencer submitted a claim for repayment. The claim was accepted only to the extent of 10% of the amount, as the Revenue took the view that Marks & Spencer had passed on 90% of the VAT paid by it to its customers and so invoked the defence of unjust enrichment.

The taxpayer contended that it had a right of repayment not only under national legislation but also as a matter of Community law and that it was contrary to Community law for that right to be restricted by the defence of unjust enrichment.

The ECJ held that although the principles of equal treatment and fiscal neutrality applied in principle in this case, an infringement did not occur merely because of a refusal to make repayment based on the unjust enrichment. However, the principle of fiscal neutrality did preclude the concept of unjust enrichment from being applied only to taxable persons in a payment situation and not to taxable persons in a repayment situation. It was necessary for the National Court to decide if this was the position in this case.

In addition, the principle of equal treatment applied in a situation where traders who sought to obtain repayment from the tax authorities found their claims were treated differently. Again it was for the National Court to decide if this was the position in this case.

For further information, see page 29.

UK House of Lords

C &E Commrs v Total Network SL [2008] UKHL19

VAT – Carousel fraud

The company was incorporated in Spain and had a bank account in the United Kingdom. The company was alleged to be part of a conspiracy involving a series of 13 alleged ‘carousel’ frauds [see below for an explanation of carousel fraud].

The issue in this case was whether the Commissioners could maintain a civil claim for damages under the tort of unlawful means conspiracy against a participant in a missing trader intra-community, or carousel, fraud.

It was held that the Revenue were entitled to recover damages at common law for conspiracy in the form of carousel fraud in order to recoup VAT which would otherwise be unrecoverable.

In reaching this decision, two questions were considered:

1. Whether it was open to the Commissioners to maintain a cause of action in damages at common law as a means of recovering VAT from a person who has not been made accountable or otherwise liable for that tax by Parliament. This was known as the exclusive regime issue.
2. Whether, if so, it was an essential requirement of the tort of unlawful means conspiracy that the conduct which was said to amount to the unlawful means should give rise to a separate action in tort against at least one of the conspirators.

In relation to the first question, it was concluded (with two dissenting) that the Revenue had other means of collecting taxes, which were not limited to the statutory code for the administration and collection of VAT.

In relation to the second question, it was concluded that criminal conduct could constitute unlawful means and be actionable as conspiracy whether or not it would be separately actionable if committed by an individual.

For further information, see page 30.

Addendum

The following is a simple explanation of carousel fraud which was taken from the Case Report:

A Carousel fraud begins with the sale of taxable goods by a trader registered for VAT in one member state, A, to a VAT-registered trader in another member state, B. The supply of goods to a trader in another member state is exempted from VAT. B then sells the goods to another VAT-registered trader, C, in its own member state, charging and receiving VAT on the consideration. It fails to account for that VAT to the taxing authorities and disappears. It becomes a missing trader. But before doing so it provides a tax invoice to C, which claims and receives the VAT that it has paid to B as input tax. C, the middleman or broker, then sells the goods to a registered trader in another member state. In the simplest form, this is A. This sale is zero-rated, so there is no output tax to set off against the input tax which C has received. B's disappearance has resulted in a profit to the conspirators, which is equivalent to the amount of the input tax received by C. It is the circularity of the transaction that gives rise to the description of the fraud as a carousel.

UK Court of Appeal (Civil Division)

Midlands Co-operative Society Ltd v R & C Commrs [2008] EWCA Civ 305

VAT – Transfer of overpayment to new owner

The taxpayer was an industrial and provident society. It carried on business as a general retailer, selling food and non-food products through retail premises, providing funerals, acting as travel agents, and carrying on the business of a motor dealer. The taxpayer 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 an 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 Court of Appeal, agreeing with 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. 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 33.

Monro v R & C Commrs [2008] EWCACiv306

Claim for repayment of tax

The taxpayer had in error overpaid a very substantial amount of tax (£846,000) which he wished to recover. The nature of his claim was summarised in the claim form issued as a restitutionary claim for the repayment of tax paid by him pursuant to a mistake of law or as tax paid pursuant to an unlawful demand being tax collected which was not lawfully due.

The taxpayer had received options in shares which he exercised within two days. One year later he sold the majority of those shares. He included the exercise of the options in his income tax return in the relevant year and the disposal of the shares in the next year's return. He based his calculation of the gain on the position pre Mansworth (HMIT) v Jelley [2003] BTC 3, i.e. the cost of the shares disposed was taken to be the value of the shares for the purposes of determining the tax due in the exercise of the option. Mansworth v Jelley held that the amount which could be deducted in the calculation of the gain should also be the market value of the shares sold as at the date of their acquisition.

As the return had been submitted on time, the legislative provisions of the Taxes Management Act 1970 apply and hence no relief was given because the liability had been based on the practice generally prevailing at the time when the return was made – the Mansworth v Jelley case occurred after this time.

The Court of Appeal upheld the dismissal of the restitutionary claim by the taxpayer. The reason for the dismissal was that specific tax legislation existed to deal with such a situation.

For further information, see page 34.

UK High Court (Chancery Division)

Birkdale School Sheffield v R & C Commrs [2008] EWHC 409 (Ch)

VAT – refund scheme for school fees

It was usual practice for fee-paying schools in the UK to offer parents the option of participating in a scheme whereby they would be entitled to a refund of an appropriate proportion of fees paid in advance if the child concerned was unable to attend school for a specified period (typically a minimum of five days) by reason of illness, or in other specified circumstances. The price that a parent had to pay for participating in such a scheme was normally a small percentage increase in the fees.

Until recently, HMRC were content to take the view that the additional charge made to parents for participation in such schemes was exempt from VAT. In 2005 there was a change of policy within HMRC and the view was taken that participation in the scheme involved a separate standard rated supply by the school of the right to obtain refunds of fees in specific circumstances.

The High Court found in favour of the school and held that the school was not liable to pay VAT on the additional “fee”. The basis for this decision was that the charge was part of the consideration in respect of a single exempt supply of educational services.

For further information, see page 35.

Stow & Ors v Stow & Ors [2008] EWHC495(Ch)

Trust assets - beneficial ownership

The deceased was a successful businessman who was survived by his second wife, two sons from his first marriage and one son from his second marriage. He had set up a Nigerian company to conduct his Nigerian business. The third claimant in the case was a shareholder of the Nigerian company.

Settlements were established, with assets including some Nigerian interests. Further settlements were established in 2002. Confusion arose over who was the settlor(s) of the settlements and who had the beneficial interest in the assets of the trusts. Five separate consequences were identified in the case.

The Revenue issued notices of determination to inheritance tax on the basis that the deceased had been the beneficial owner of the assets in the settlements. The trustees appealed.

The claimants sought declaratory relief against the Revenue. The issue in this case was not which of the five consequences was valid but whether the High Court proceedings should be stayed as against the Revenue pending resolution of the beneficial ownership issue.

The High Court declined to stay the proceedings for declaratory relief by trustees of a settlement.

For further information, see page 37.

Rind v Theodore Goddard (a firm) & Ors [2008] EWHC459(Ch)

IHT – duty of care

The claimant's mother acquired the freehold of an office building in London. She received tax planning advice from one of the defendants. She made a gift of the freehold to the claimant. When she died, inheritance tax was paid by the claimant in respect of the property in the estate including the building which had been gifted to the claimant earlier.

The claimant issued proceedings alleging that the inheritance tax had arisen because of negligent estate planning advice given by the defendants.

The judge refused to issue a summary judgement. As the deceased could not suffer a liability to inheritance tax, therefore she did not suffer any loss as result of the alleged defendant's negligence. However, the key issue in the case was that a separate trial of the action would be necessary to establish whether the defendants owed a duty of care to the claimant.

For further information, see page 38.

Wild & Anor (t/a Audrey's Pianos) v R & C Commrs

VAT – partnership

The taxpayers (a husband and wife) commenced a business to give piano lessons and sell used pianos. Later they began selling new pianos. Over time eight companies were formed to carry out various aspects of the business. All new pianos were purchased by the taxpayers in partnership and all cash sales of pianos were made by that partnership. Management charges were raised by the taxpayers on all companies even though there was no evidence that the companies traded.

VAT returns submitted by the taxpayers over a period showed inputs exceeding outputs. It was Customs view that the VAT was underdeclared as the returns did not reflect the true nature of the trade of the taxpayers. It had been Customs view that the taxpayers, together with the companies were trading in partnership.

The VAT Tribunal found that the taxpayers had failed to produce records or co-operate with Customs which made it difficult for Customs to make proper assessments. The evidence pointed to the fact that there was a single business being carried on by the taxpayers together with the companies.

The High Court found that there had been no error in law in the way in which the Tribunal directed itself.

For further information, see page 39.

Pipe &Ors v R & C Commrs [2008] EWHC (Ch)

Income tax – penalty notice

The taxpayer had been served with notices under section 8 of TMA 1970 on various dates between 6 April 1999 and 13 December 2001 requiring her to make and deliver tax returns for the seven tax years from 1996/7 to 2002/3. She failed to comply with the notices before the due dates (the latest of which was 31 January 2004) or at all. The General Commissioners directed that she should be liable to a penalty or penalties for each day on which each failure continued after the day on which she was notified of the direction.

The taxpayer was accordingly advised of the penalty due including the statement-“Daily penalties of £60.00 per day for the period from 15 April 2004 to 28 April 2004 (14 days).” It was clear that the specified period of 14 days from 15 April to 28 April 2004 in respect of which the daily penalty of £60 was purportedly imposed must have been a mistake – as she was only notified of this direction on 8 September 2004. The taxpayer was subsequently advised of this error and that the actual period should have been from 15 September 2004 to 28 September 2004.

It was held that the daily penalties imposed were valid in law, even though a mistake about the dates for which penalties had been imposed had been included in the penalty notice sent to the taxpayer. The key issue in the decision was that the taxpayer was aware from the notification of the penalties being charged for defaulting. The mistake came later in the process. The error was not so fundamental as to invalidate the determination.

For further information, see page 40.

Scottish Court of Session

R & C Commrs v Board of Governors of Robert Gordon University [2008] CSIH 22

VAT – training of students through subsidiary company

In 1996, the Secretary of State for Scotland and the Robert Gordon University (RGU) entered into an agreement, where RGU agreed to provide and to perform certain specified services related to the training of students in nursing and midwifery to standards that would lead to the award of a Diploma in Nursing or in Midwifery, or its equivalent, and that would lead also to registration with the United Kingdom Central Council for Nursing Midwifery and Health Visiting.

It was agreed between the appellants, HMRC, and RGU that the provision of those services under the 1996 Agreement constituted a supply for VAT purposes, and that the supply was an exempt supply.

The contract was assigned to a subsidiary company, with the purpose that the services supplied by the company would be standard-rated, which would allow the company to recover input VAT.

Revenue argued that there was only one supply of education for VAT purposes.

The Court found in favour of the Revenue, that the supply of services relating to training of student nurses and midwifes by RGU through the subsidiary company was an exempt supply of education for VAT purposes. The following quote summarises the reason for the finding:

“Objectively, the reality of the contract between the parties was that RGU remained for all practical purposes in control of the staff, the provision of the courses, the monitoring of performance and staff discipline, the examination of the students and the awarding of their diplomas, the provision of the social and environmental services required for their education, and their preparation for registration. It either remained solely responsible for the provision of the equipment necessary for nursing and midwifery training or was impliedly obliged to provide that equipment to Univation under the Services Agreement. There was no material difference between the situations before and after the arrangements were entered into.”

For further information, see page 41.

Special Commissioners

Trevor Smallwood Trust v R & C Commrs

Tax treaty – residence

The appeal relates to a tax avoidance scheme that is intended to work in the following way:

• A non-resident trust which has a gain on its assets appoints Mauritian trustees for part of a tax year and realises the gains during the period that the trust is resident in Mauritius. UK resident trustees are appointed before the end of the tax year. Specific legislative provisions potentially apply because the trustees are resident in the UK for part of the year. Conversely another legislative provision, which attributes gains of non-resident settlements to beneficiaries, does not apply if the trustees are UK resident for any part of the year. The Trustees argue that the Treaty prevents the United Kingdom from taxing the gains.

In this case, the taxpayer settled property on trust for the benefit of himself and his family. The taxpayer and his wife were the trustees of the Trust. On 10 January 2001 the then trustees sold shares giving rise to chargeable gains. On 26 January 2001 the then trustees sold more shares giving rise to chargeable gains. The Trustees claimed that they were entitled to double tax relief because, at the dates of the disposals, the Trust was resident in Mauritius. The Revenue disallowed the claim for double tax relief.

It was decided that the corporate trustee was not solely resident in Mauritius for the purpose of the UK/Mauritius Tax Treaty when the gains were made on the sale of the shares held in the trust. The place of effective management of the trust was the UK.

For further information, see page 43.

Flaxmode Ltd v R & C Commrs

Tax administration – valid notice

The taxpayer was a partner in a partnership carrying on the business of catering butcher. The returns showed that the taxpayer was the nominated partner. Revenue commenced enquiries into the returns for two years by writing to each of the partners. They sent a letter to one of the partners (not the nominated partner) requesting documents and particulars. In the letter they referred to a different partner as the nominated partner. Revenue subsequently sent letters to the nominated partner requesting the documentation. The case focused on the initial letter to the taxpayer and its validity as a notice of enquiry. The taxpayer argued that the earlier notice was not valid as it had not been sent to the nominated partner.

The Special Commissioner decided that the notice sent to the nominated partner advising that Revenue would be enquiring into the returns of the partnership was a valid notice, even though it did not refer to the taxpayer as the nominated partner. The key issue in the decision was that it was quite clear from the letter to the taxpayer that Revenue would enquire into the partnership returns. It was not a mere courtesy letter.

For further information, see page 44.

Perrin v R & C Commrs

Expenses incurred wholly, exclusively and necessarily

This case should interest all readers of tax.point.

The taxpayer was a Chartered Certified Accountant. Before he qualified he was employed by a firm of Chartered Accountants. The terms of his contract with the firm obliged him to incur payments in respect of course fees and reference materials to enable him to qualify. He made those payments and argued that they were incurred wholly exclusively and necessarily in the performance of the duties of his employment with the firm and accordingly that they were deductible in determining his taxable income.

The Special Commissioner decided that the expenses were not incurred wholly, exclusively and necessarily in the performance of his duties; and so could not be deductible in calculating his taxable income.

The firm's staff handbook made it clear that “failure to attend an external course at an educational establishment or college for which study leave has been granted will justify summary dismissal of the individual concerned.” The taxpayer regarded the attendance at the training courses as in the performance of the duties of his employment.

The taxpayer distinguished his situation from a number of similar cases in which it was held that the expenses were not deductible:

• The taxpayer was obliged to attend a course and his employment would be terminated if he ceased to study for the examinations. These factors pointed towards attendance being part of the duties of the employment;
• The very title “trainee accountant” suggested that training, and therefore attendance on the courses, was part of the taxpayer's duties;
• In the taxpayer's case, his attendance at the courses was not merely “not unconnected” with his work but part of those duties and important for them;
• The taxpayer had to do the training as part of his duties not just to do them better;
• The taxpayer's fees were for course attendance on which his employer benefited and the obligation to the employer fulfilled.

The key issue in this case was that it was a necessary condition for deductibility that the expenses were incurred in the performance of his duties. In order to deal with this issue, it was necessary to decide what the nature of the job was, before it could be decided whether what was done was in the course of the job, or was merely enabling or improving.

It was decided that the taxpayer was not being paid for attending courses, but for his work in the firm's business. Factors in this decision were:

• Some of the courses took place partly on Saturdays and he was not paid for attendance on Saturdays;
• The staff handbook indicated that study leave could be granted at the discretion of the firm, which was described as “leave”, i.e. in the nature of time away from his duties.

Ah yes, the old ones are the best …

For further information, see page 45.

Lloyd v R & C Commrs

Bona fide commercial reasons

The Appellant sold his entire shareholding (38.2%) in a company to the Holding Company (which had held 47% prior to the sale). At the time of the sale of shares the Appellant was able to control the Holding Company. The consideration included an earnout based on profits of the following five years. He paid capital gains tax on the consideration received, after availing of various reliefs including retirement relief.

The Appellant contended that the transaction was needed to retain the services of two directors of the company who were concerned about their being minority shareholders.

There were two issues to deal with in this case, the first being whether the transaction was carried out for bona fide commercial reasons and not whether it was a bona fide commercial transaction; and the second being whether its main objective was to enable the tax advantage to be obtained.

The Special Commissioner decided that the transaction was carried out for bona fide commercial reasons. The key reason for this decision was that retaining the services of the two directors was important to the company's business and was a commercial reason. While the two directors were in the same position after the transaction, they saw the transaction as part of the ultimate end which was being pursued (even though the transaction was subsequently shown not to be necessary to achieve the ultimate end).

In relation to the second issue, the Special Commissioner found that the tax advantage was one of the main objects of the transaction. The reason for this decision was that the tax treatment of the transaction was important to the existence and timing of the transaction – the ultimate end could have been achieved by other means.

Therefore, while the Special Commissioner decided that the sale of shares was carried out for bona fide commercial reasons, as one of the main objects was to enable a tax advantage, the Revenue were entitled to issue a notice cancelling the tax advantage.

This case shows what may lie ahead for Ireland following the introduction of a bona fide commercial test to retirement relief in Finance Act 2008.

For further information, see page 45.