Investment Trust Companies ((in Liquidation)) (A3/2013/2066 and A3/2013/2070) v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten |
| Judgment Date | 12 February 2015 |
| Neutral Citation | [2015] EWCA Civ 82 |
| Docket Number | Case No: A3/2013/2066 |
| Court | Court of Appeal (Civil Division) |
| Date | 12 February 2015 |
[2015] EWCA Civ 82
Lord Justice Moore-Bick
Vice President of the Court of Appeal, Civil Division
Lord Justice Patten
and
Lord Justice Beatson
Case No: A3/2013/2066
A3/2013/2070
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Henderson J
Royal Courts of Justice
Strand, London, WC2A 2LL
Laurence Rabinowitz QC, Andrew Hitchmough QC and Michael Jones (instructed by PricewaterhouseCoopers Legal LLP) for Investment Trust Companies (in Liquidation)
Andrew MacNab and George Peretz (instructed by the Solicitor for HM Revenue & Customs) for the Commissioners
Hearing dates: 21, 22 and 23 October 2014
Introduction
This is the judgment of the Court.
The claimants are all closed-end investment trusts who obtained investment management services under contracts with various management companies ("the Managers"). Closed-end investment trusts, as their name suggests, are fixed period investment vehicles. They are incorporated as limited companies subject to a term date when they are wound up and their assets distributed to the holders of the issued shares. This explains why the claimants are now in liquidation. Under the terms of the management agreements, the Managers were paid fees for the services they provided plus VAT "if applicable". The UK tax treatment of these services at the time when they were provided was that they were subject to VAT at the standard rate. Although from 1990 there had been an express exemption for investment management services supplied to authorised unit trust schemes and this was extended after 1997 to open-ended investment companies, the Value Added Tax Act 1994 (" VATA 1994") continued to treat the supplies of services to closed-end investment trusts as taxable and from 1990 onwards the Managers accounted for VAT on that basis.
On 28 June 2007, following a reference from the VAT and Duties Tribunal, the ECJ ruled in Case C-363/05 J P Morgan Fleming Claverhouse Investment Trust Plc and another v HMRC, [2007] ECR I-5517, [2008] STC 1180 (" Claverhouse") that the provisions of Article 13B(d)(6) of the Sixth VAT Directive, which included within the categories of services qualifying for exemption from VAT the "management of special investment funds", were capable of including closed-end investment funds and that in defining the funds in their territory which were to benefit from the exemption:
"Member States must respect the objective pursued by that provision, which is to facilitate investment in securities for investors through investment undertakings, while guaranteeing the principle of fiscal neutrality from the point of view of the levying of VAT on the management of special investment funds which are in competition with other special investment funds such as funds falling within the scope of the UCITS Directive."
The ECJ in Claverhouse ruled that Article 13B(d)(6) had direct effect and HMRC correctly interpreted the ruling of the ECJ as indicating that in implementing the Directive it would be difficult to justify any distinction in treatment between closed-end investment trusts and other forms of special investment funds. On 7 November 2007 they announced (in Business Brief 65/07) that fund management services supplied to investment trust companies, like the claimants, would be treated as exempt supplies and with effect from 1 October 2008 Items 9 and 10 of Group 5 in Schedule 9 VATA 1994 were amended to include the management of a close-end collective investment undertaking.
It followed from this that between 1 January 1990 and 1 October 2008 the UK had failed properly to transpose Article 13B(d)(6) into national legislation and that the Managers who had supplied the services and accounted for the output tax on them were entitled to make claims for repayment under s.80 VATA 1994.
Section 80 (as amended by the Finance (No. 2) Act 2005) then provided that:
"(1) Where a person –
(a) has accounted to the Commissioners for VAT for a prescribed accounting period (whenever ended), and
(b) in doing so, has brought into account as output tax an amount that was not output tax due,
the Commissioners shall be liable to credit the person with that amount.
…
(2) The Commissioners shall only be liable to credit or repay an amount under this section on a claim being made for the purpose.
(2A) Where—
(a) as a result of a claim under this section by virtue of subsection ( 1) or (1A) above an amount falls to be credited to a person, and
(b) after setting any sums against it under or by virtue of this Act, some or all of that amount remains to his credit,
the Commissioners shall be liable to pay (or repay) to him so much of that amount as so remains.
(3) It shall be a defence, in relation to a claim under this section by virtue of subsection ( 1) or (1A) above, that the crediting of an amount would unjustly enrich the claimant.
…
(4) The Commissioners shall not be liable on a claim under this section—
(a) to credit an amount to a person under subsection ( 1) or (1A) above, or
(b) to repay an amount to a person under subsection (1B) above,
if the claim is made more than 3 years after the relevant date.
…
(7) Except as provided by this section, the Commissioners shall not be liable to credit or repay any amount accounted for or paid to them by way of VAT that was not VAT due to them."
A claim for repayment had therefore to be made within three years of the relevant date which was the end of the prescribed accounting period referred to in s.80(1)(a). It was also subject to the important provisions of s.80(2A) which, in conjunction with s.81(3) and s.81(3A) VATA 1994, operate to limit the repayment to the net amount of overpaid tax which remains after deducting from the amount of output tax any deductions of input tax which the Managers had made when accounting for the tax on their supplies of services. HMRC were not therefore required to repay to the Managers more than the net amounts (after setting input tax deducted against that output tax) that they received in the relevant accounting periods.
Section 80(3) (as supplemented by regulations under VATA 1994) has the effect of avoiding the unjust enrichment of the taxpayer by making its claim for repayment conditional on it entering into arrangements to reimburse its customers who have paid the VAT on the taxable supplies of goods or services with the amount of the overpaid VAT which is recovered. For reasons which I will come to, this is not an issue in this case because the Managers have refunded to the claimants what they have recovered under s.80 from HMRC.
On these appeals we are concerned with the position of three out of the nine claimants in these proceedings. They are Kleinwort Overseas Investment Trust Plc ("Kleinwort Trust"), F & C Income Growth Investment Trust Plc ("F & C Trust") and M & G Recovery Investment Trust Plc ("M & G Trust") who were selected as lead claimants under a consent order made on 25 January 2010. Four of the claimants (including Kleinwort Trust) were registered in the UK for VAT for the relevant accounting periods. The remaining five (including F & C Trust and M & G Trust) were not. An investment trust which invests only in stocks, shares and other securities within the EU is exempt from VAT and makes no taxable supplies. It is not therefore required to be registered. But if (like Kleinwort Trust) it also invests outside the EU then it is entitled to recover UK input tax in respect of its non-EU activities which are not exempt but zero rated. The amount of input tax recoverable is calculated by reference to its non-EU investments as a proportion of its total portfolio expressed as a percentage known as its partial exemption rate. For Kleinwort Trust this was an average of 58.4% over the relevant accounting periods.
The trial judge (Henderson J) was presented with two diagrams which are appended to this judgment. The first illustrates the payment flows relevant to F & C Trust and M & G Trust which, for the reasons explained above, were not registered for VAT and were therefore unable to recover input tax. As a consequence, they bore the full cost of the VAT on the supply by the Managers of the services rendered to them. Diagram 2 illustrates the position of Kleinwort Trust which was able to recover on average 58.4% of any related input tax thereby reducing its economic loss to 41.6% of the VAT which it was charged in respect of management services.
Both diagrams are based on a notional VAT payment to the Managers of £100. In the case of F & C Trust and M & G Trust, the £100 VAT is received by and paid to the Managers who make a VAT return for the relevant accounting period declaring the £100 as output tax but claiming a set-off of £25 (another notional figure) for the input tax which the Managers have paid on allowable supplies made to them in connection with their supply of management services. The £25 will not necessarily have been accounted for and paid to HMRC as the output tax of the supplier. The Managers' own right to deduct input tax is not conditional upon the Managers' supplier accounting for the £25 as output tax or upon HMRC receiving that sum from the supplier. HMRC will thus recover from the Managers the amount of the Managers' own output...
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