Anise Ltd and Others v Hammond
| Jurisdiction | England & Wales |
| Judgment Date | 24 March 2003 |
| Date | 24 March 2003 |
| Court | Special Commissioners |
special commissioners decision
Stephen Oliver QC, Dr David Williams.
Hugh McKay (instructed by Turner and Brown, chartered accountants) for the appellants.
Ian Jarman, HM Inspector of Taxes, for the respondent.
1. The four appellant companies appeal against corporation tax assessments in respect of their trading profits for their accounting periods ending 31 December 1993. The appellant companies are Anise Ltd, Basil Ltd, Chive Ltd and Dill Ltd. They are all members of the same group of companies.
2. The four appellant companies, to which we refer collectively as "the members of the trading group" or as "the trading group", all carried on similar businesses selling advertising space in brochures and supplying those brochures free of charge to users. That was the central business of those member companies and of the group. The issue in the case is whether sums of money mistakenly paid to those members of the trading group by customers or the paying agents of customers, and not repaid by those companies to those customers or paying agents, were subject to corporation tax. If they were, the second issue was in what year the sums fell to be taxed.
3. The primary facts were not in dispute before us. The group finance controller of the trading group gave evidence before us in confirmation of specimen transactions, but in our view nothing turns on the individual details of transactions. On that basis, we find the following to be the relevant facts.
4. The business of each of the member companies in the trading group was that of publishing and circulating brochures and booklets containing advertising for which the companies were paid by advertisers. This was a profit-making business in the years in question for each company. It was not contended before us that the companies were engaged in any other relevant business activity.
5. The payments about which the appeals are concerned arose as follows. The members of the trading group all adopted a similar method of securing payment for the advertisements they produced and published. When a representative of a member company identified an advertiser, the advertiser was asked to sign a contract confirming the agreement and arranging for payment in a standard fashion. The standard terms were that payment was made in three stages. At the time the contract was signed the customer paid the representative a cheque by way of deposit for the advertising services. Typically, the amount of the cheque would be 17.5 per cent of the net contract price. In effect this represented the VAT that would apply to the price of the agreement. Again typically, the customer was asked to fill in a banker's order to make two equal payments for the price of the advertisement to be provided (net of VAT). The first half payment was due and payable seven days after the customer approved a proof copy of the advertisement. The second half payment was due one year later. The significance of the two-year period was because most of the publications produced by the trading group had an effective life of two years before a new issue.
6. Experience showed that the members of the trading group received excess payments under some standing orders. This might be by error of the customer or of the customer's bank. It was not alleged that the member companies engaged in activities that would cause or facilitate these errors by others. When erroneous payments were received, the members of the trading group accounted for the overpaid sums as creditors on the basis that they were repayable to the bank or other paying agent that paid the member. If an overpayment was claimed back, it was repaid subject to an administration charge.
7. Until the financial year ending 31 December 1992, overpayments that had not been claimed back remained as creditors in the accounts until they were six years old. After six years they were written to the profit and loss account. As such they were included in the taxable profits of the member company.
8. From the start of the financial year on 1 January 1993 the members of the trading group, acting on the advice of their accountants, took two different views of the overpayments. First, the view was taken that the overpaid sums were not taxable receipts. This was because they were not trading receipts. Second, the view was taken that the overpaid sums should, on the basis of reclaims experience, be transferred to the profit and loss account after two years, not six years as before. To give effect to the new policies, overpayments for the years from 1 January 1987 to 31 December 1990 were written into the profit and loss accounts for the accounting year 1993 as an exceptional item, and the two-year-old overpayments were written into the profit and loss accounts as non-trading receipts. The sums were shown in the accounts of the members as non-trading receipts and in the corporation tax computations for 1993 and subsequently in the same way. The adjustments made in 1993 were included in the accounts of each member as an "exceptional item" and shown in the computation as non-taxable.
9. The trading group received considerable numbers of overpayments during 1993 and thereafter. A detailed schedule produced to us of the overpayments received by one member company shows that in many cases the sums were refunded to the bank or customer, but in many cases they were not. The overpayments also did not arise for a single reason. Some appear to be payments made monthly rather than annually, and some appear to be payments of wrong amounts. Others appear to be paid on dates that have no obvious relation to the payments properly made. The more common form of overpayment was a single excess payment after the two annual payments had been made - sometimes several years later. There is, again, no pattern to the overpayments that were refunded, save that refunds were made in most cases of multiple overpayment.
10. The scale of the overpayments received varied from one member company of the trading group to another. One member company, however, received excess payments of £62,900 in the trading year to 31 December 1993, and entered an exceptional item of £199,602 into its profit and loss account when it reduced the period of holding overpayments from six years to two years. No information was available about whether the member company had subsequently refunded any of those overpayments following subsequent demands for their return.
11. We find on the evidence that these payments were sums of money to which, on receipt, the member companies were not entitled. They had not sought them, and they did not arise from any contractual link between the member company and the payer. Nor did the member companies regard the sums as money to which they were entitled on receipt. If a refund was requested (and sometimes the request was invited) then it was made, subject to the administration charge. Further, it was not clear that the customers themselves were always aware of the overpayments, or bore the cost of them, as they might be occasioned by faulty procedures by the banks and building societies that acted as the paying agents for the bankers' orders. We emphasise that there is no suggestion that the member companies were conducting their business so as to receive the overpayments. That was not part of their trade.
12. We therefore conclude that the overpayments were not received as part of the terms of trade of the member companies. They did not arise as a direct consequence of the trading relationships between the trading group and its customers.
13. The inspector of taxes took the view that all the sums representing overpayments should be included in the taxable receipts of the members of the trading group at an appropriate date, and the taxpayers appealed. The case was heard by us on the issue of principle.
14. Hugh McKay for the trading group introduced the case as an old-fashioned tax appeal concerned with basic principles. The question for each of the taxpayers, in each year in question, was whether the overpaid sums taken to the profit and loss account were, or were not, trading income within Case I of Sch. D of the income tax (as applied to corporation tax).
15. The relevant provision is in Income and Corporation Taxes Act 1988 section 81 subsec-or-para 1s. 18(1)-(3) of theIncome and Corporation Taxes Act 1988 which, so far as relevant, provides:
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(1) …
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Tax under this Schedule shall be charged in respect of-
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(a) the annual profits or gains arising or accruing-
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(i) to any person residing in the United Kingdom from any kind of property whatever, whether situated in the United Kingdom or elsewhere, and
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(ii) to any person residing in the united Kingdom from any trade, profession or vocation, whether carried on in the United...
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