Shop Direct Group and Others v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 19 April 2013 |
| Neutral Citation | [2013] UKUT 189 (TCC) |
| Date | 19 April 2013 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2013] UKUT 189 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Asplin J.
David Goldberg QC and Michael Jones (instructed by Weil, Gotshal and Manges) for the Appellants.
Malcolm Gammie QC and Elizabeth Wilson (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents.
Corporation tax - Receipts of payments in respect of overpaid VAT and statutory interest - Whether VAT repayments t/a receipts - Whether payments in respect of supplies made in discontinued trades chargeable to tax as post-cessation receipts - ICTA 1988, Income and Corporation Taxes Act 1988 section 103 section 106 subsec-or-para 2ss. 103 and 106(2) - Whether payments in respect of interest taxable under Sch. D, Case III - Loan relationships rules - Whether a "money debt" - FA 1996, Finance Act 1996 section 100s. 100
The Upper Tribunal has upheld the decision of the First-tier Tribunal that repayments of overpaid output VAT were taxable as trading receipts and that interest arising on those repayments was taxable under Income and Corporation Taxes Act 1988 section 18Sch. D, Case III
Repayments of overpaid output VAT (referred to as "VRPs" in the decision), plus interest ("IPs"), were made by HMRC. As the original suppliers were in VAT groups, the VRPs and IPs were made to the representative member of the group. Amounts representing the VRPs and IPs (the "Sums") were redirected to the Appellants and appeared in their accounts. This situation was complicated further by a number of business transfers. The First-tier Tribunal (Shop Direct Group; Shop Direct Home Shopping Ltd; Reality Group Ltd; Littlewoods Retail LtdTAX[2012] TC 01823) had found in favour of HMRC that the VRPs were taxable as trading income under Sch. D, Case I or VI and that the IPs were taxable under Sch. D, Case III. The Appellants appealed to the Upper Tribunal on a number of bases.
In essence, the Appellants argued that, as a result of the payments and repayments having been made through VAT groups so that only the representative member was entitled to the receipt of the VRPs and IPs, the source of the Sums was the statute (VATA 1994, Value Added Tax Act 1994 section 80s. 80) and not a trade and that the Appellants were not beneficially entitled to the Sums and so could not be taxed on them. Equally, the IPs could not be characterised in a way which rendered them assessable to corporation tax. Lastly, and in the case of those VRPs received by Appellants which did not carry on the former trades, the VRPs could not be taxed as post cessation receipts.
The Upper Tribunal upheld the decision of the First-tier Tribunal, finding against the Appellants. The First-tier Tribunal was right to conclude that the statute was the machinery by which the repayment was made and that the true source of the repayments was the original trades by which the overpayments of VAT were generated. In the absence of any indication that the Sums were received by way of gift, the First-tier Tribunal was correct to find that each Appellant was entitled to each respective sum. The VRPs received by those Appellants which did not carry on the former trades were taxable under ICTA 1988, Income and Corporation Taxes Act 1988 section 103s. 103 as post-cessation receipts of a trade; in the circumstances ICTA 1988, Income and Corporation Taxes Act 1988 section 106 subsec-or-para 2s. 106(2) did not apply to exclude Income and Corporation Taxes Act 1988 section 103s. 103.
Having found that the Appellants were beneficially entitled to the VRPs, it followed that the payments of interest from the representative members of the VAT groups were monetary compensation for the Appellants for being kept out of their money over a period of time. As such, the IPs were interest and taxable on the Appellants under Sch. D, Case III (in one instance, as it stood before the introduction of the loan relationship rules and, in all other cases, as it applied for corporation tax purposes on the basis that the payments were profits or gains arising from loan relationships).
The Upper Tribunal has confirmed that refunds of output VAT, and interest on those refunds, are subject to corporation tax. In this case, it did not matter that the repayments were made through the representative member of a VAT group, or that some of the recipients of the refunds did not carry on the trades which give rise to those refunds. The Upper Tribunal has also clarified the interaction of some of the provisions dealing with post-cessation receipts (now at CTA 2009, Corporation Tax Act 2009 part 3 chapter 15Pt. 3, Ch. 15).
[1]This is an appeal by Shop Direct Group (SDG), Shop Direct Home Shopping Limited (SDHSL), Reality Group Limited (RGL), and Littlewoods Retail Limited (LRL), (together referred to as the Appellants) from a decision of Judge Berner and Miss O'Neill sitting in the First-tier Tribunal (Tax Chamber) ("FTT"), dated 14 February 2012 (see [2012] UKFTT 128 (TC); [2012] TC 01823) ("the FTT Decision"). The case concerns the corporation tax treatment of sums appearing in the Appellants' accounts which are equal in amount to repayments of overpaid VAT ("VRPs") and interest arising on those repayments ("the IPs") together referred to as "the Sums".
[2]The FTT decided that each of the VRPs were trading receipts of existing trades or trades which have discontinued and all were chargeable to corporation tax on the Appellants under Schedule D Case I or VI as the case may be. Further, it decided that all the IPs were properly assessable on the Appellants under Schedule D Case III. Accordingly, the Appellants' appeal against amendments made by the Commissioners for Her Majesty's Revenue and Customs (HMRC) to the corporation tax self assessments of the Appellants for various accounting periods were dismissed.
[3]There were eight VRPs and corresponding IPs save in respect of VRP5 in relation to which there was no IP. The appeal relates to each of the VRPs and IPs save for such parts of VRPs 4 and 6 and IPs 4 and 6 which are attributable to supplies made by six companies when they were not members of a VAT group. The extent of those parts of VRPs 4 and 6 and IPs 4 and 6 (the Excluded Parts) is not known or quantified at present. The six companies were Brian Mills Limited, Burlington Warehouses Limited, Janet Frazer Limited, John Moores Home Shopping Service Limited, Littlewoods Warehouses Limited and Peter Craig Limited (the Six Companies). They were received as a result of LRL and SDHSL respectively having a direct entitlement to the repayments and interest rather than as payments received from the representative member of a VAT group in their capacity as members of that group.
[4]The Appellants appeal on six bases. It is said that the FTT erred in law:
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(i) in holding that the VRPs and, accordingly, the IPs arose from a trade carried on by the Appellants which recorded the relevant sums ("the Sums") in their accounts (the Source argument);
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(ii) in determining that the Appellants had a beneficial entitlement to the VRPs and IPs as if it were a question of fact instead of a question of law or a question of mixed fact and law and as a consequence erred in concluding that the VRPs and IPs were taxable (the Beneficial Entitlement argument);
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(iii) in holding that SDG was liable to tax under Income and Corporation Taxes Act 1988 section 103section 103 Income and Corporation Taxes Act 1988 (ICTA) in respect of those parts of VRP2 which related to the trades of GUS plc, Kay & Company and Abound Ltd in circumstances in which the FTT also held that the rights to those parts of VRP2 had been retained by those companies (the SDG Retention argument);
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(iv) in construing the asset sale agreement between SDG and SDHSL dated 28 October 2005 (the 2005 Agreement) as ineffective to transfer to the latter such rights as SDG had to VRP2 and IP2 (the SDG Construction argument);
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(v) in construing Income and Corporation Taxes Act 1988 section 103section 103 ICTA as imposing a charge to tax on any person receiving a particular sum regardless of whether that person formerly carried on the trade to which the sum related (the s. 103 argument);
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(vi) and lastly,
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(vii) in holding that IP6 was taxable on LRL as interest under Case III Schedule D and in holding that the remainder of the IPs were payments of interest and in holding that such interest fell within the loan relationship rules, (the Interest arguments).
[5]In essence, the Appellants contend that the effect of the original payment of VAT and the consequent receipt of the VRPs and IPs through VAT groups, with the result that only the representative member was entitled to the receipt of the VRPs and IPs, is that the source of the Sums is not a trade, nor can it be established as a matter of law or fact that the Appellants as recipients of the Sums as opposed to the VRPs and IPs themselves were beneficially entitled to the Sums. Equally, in relation to the IPs they contend that the IPs cannot be characterised in a way which renders them assessable to corporation tax. Lastly, as a result of a number of transactions, in the case of VRPs and IPs 2 and 5, the Appellants contend that the Sums cannot be treated and taxed as post cessation receipts.
[6]HMRC's case in response is simple. It is said on their behalf that the FTT made findings of fact which were open to it, and its decision that the VRPs and IPs thereon were chargeable receipts of the respective Appellants was the inevitable result of applying the correct legal test to those facts.
[7]More particularly, HMRC contends that the FTT rightly held that each repayment was a receipt of the respective Appellants (consistent with the Appellants' accounts); that each repayment arose from the trade of those against whom the VAT had been wrongly charged ("the real source"); and that the Appellants...
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