Shop Direct Group v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 February 2012 |
| Neutral Citation | [2012] UKFTT 128 (TC) |
| Date | 14 February 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 128 (TC)
Judge Roger Berner (Chairman); Miss Sandi O'Neill (Member)
David Goldberg QC and Michael Jones, instructed by Weil, Gotshall & Manges, for the Appellant
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
1.These are the appeals of the Appellants against amendments made by HMRC to the corporation tax self assessments of the Appellants for various accounting periods. The amounts of tax at issue are very considerable, but there is no dispute on the figures. The issues before us are accordingly issues of principle only.
2.All the appeals raise common issues, although the facts on which those issues arise are different in each case. What is common is that the issues concern the correct tax treatment of amounts received by each of the Appellants which derived from the determination or settlement of a number of long-running disputes between HMRC and companies that were at the material times representative members of the relevant VAT groups, as a result of which those representative members received repayments of amounts that had been wrongly accounted for as VAT, and - in most cases - statutory interest on those amounts.
3.There are two issues. The first is whether, as HMRC contend, the repayments of amounts wrongly paid as VAT (which, for shorthand, we shall describe as VAT repayments or VRPs) are liable to corporation tax as receipts taxable under Schedule D Case I or Case VI. The second issue is whether the amounts received in relation to statutory interest paid by HMRC on the repayments are liable to corporation tax as loan relationship credits or otherwise. These we describe as interest payments or IPs.
4.In essence, the Appellants say that neither the VRPs nor the IPs can be brought into account as receipts in the computation of any of the Appellants' profits because they are not from a taxable source. In particular, but without limitation, they do not arise from the carrying on of a trade and they are not from any form of debt obligation. As regards all the Appellants other than Reality Group Limited ("RGL") the Appellants say that they had no entitlement, as against HMRC or anyone else, to the VRPs or the IPs, and that those receipts were therefore by way of gift. As regards RGL, which received a VAT repayment as representative member, this was simply due to the fact that it was the relevant representative member entitled to the repayment from HMRC, and its retention of the payment was a matter of its own choice.
5.The Appellants were represented by David Goldberg QC with Michael Jones. Malcolm Gammie appeared for HMRC with Elizabeth Wilson.
6.We had a helpful statement of agreed facts, which we reproduce below. The statement refers to various appendices, which we have appended to this decision. The footnotes and annotations to the statement are those of the parties and not the Tribunal.
7.The statement includes a helpful glossary of abbreviations, which we have also adopted.
A.The VAT Repayments and Interest Payments
1.An agreed schedule of payments to which the appeals relate is set out at Appendix 1. The payments are labelled in this document as VAT Repayments 1 to 8 and Interest Payments 1 to 8. The facts stated in Appendix 1 are agreed so that, for example but without limitation, the identity of the entities referred to in columns 3, 5, 7 and 8 of the Schedule of VAT Repayments within Appendix 1 and the cash movements described in column 8 are agreed facts, as are the similar facts appearing in the Schedule of Interest Payments contained within Appendix 1.
2.Appendices 2 and 3 show the trade transfers which occurred within the Littlewoods and GUS sides of the group respectively. Appendix 4 sets out details (including any previous names) of the main companies involved in the factual background to the appeal.
3.A glossary of abbreviations is appended to this Agreed Statement of Facts.
B.The Assessments
The First Appellant, SDG
4.SDG appeals against amendments to its corporation tax returns
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(i) for the period 1 April 2004 to 31 March 2005;
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(ii) for the period 1 April 2005 to 30 April 2005;
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(iii) for the period 31 January 2007 to 30 January 2008.
5.SDG's appeal relates to a repayment in respect of overpaid VAT1 in the sum of £15,686,929 ("VAT Repayment 1") and a payment of statutory interest in the sum of £1,328,993 ("Interest Payment 1")2 made between February 2005 and 1 June 2005. Sums equal in amount to VAT Repayment 1 and Interest Payment 13 were accounted for as part of a £25,300,000 exceptional item within operating expenses in SDG's profit and loss account for the 13 month period ending 30 April 2005. The item is described as "VAT Recovery" in the 2005 accounts and Note 3 to the accounts states: "The company has also reclaimed VAT following a successful claim brought against HM Customs and Excise regarding the treatment of commission payments to agents".
6.Its appeal also concerns a repayment in respect of overpaid VAT in the sum of £124,963,600 ("VAT Repayment 2") made on or about 19 September 2007 and a payment of statutory interest in the sum of £174,828,209 ("Interest Payment 2")4 made on 19 September 2007. Sums equal in amount to VAT Repayment 2 and Interest Payment 2 were accounted for as an exceptional item of £299,791,000 in SDG's profit and loss account for the period ended 30 January 2008. Note 2 to the financial statements for 2008 states "The current year exceptional item is in relation to a repayment in respect of VAT output tax and related interest. The funds were received by LW Corporation Limited and have been added to the parent undertaking debtor (see note 5)".
7.SDG is assessed in respect of the periods 1 April 2004 to 31 March 2005 and 1 April 2005 to 30 April 2005 on the basis that VAT Repayment 1 and Interest Payment 1 should be apportioned between those periods and brought into account so as to increase SDG's taxable profits for those periods by sums equal to the aggregate of VAT Repayment 1 and Interest Payment 1.
8.SDG is assessed in respect of the period 31 January 2007 to 30 January 2008 on the basis that VAT Repayment 2 and Interest Payment 2 should be brought into account in that period so as to increase SDG's taxable profits for that period by an amount equal to VAT Repayment 2 and Interest Payment 2.
The Second Appellant, SDHSL
9.SDHSL appeals against amendments to its corporation tax returns:
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(i) for the period 1 May 2004 to 30 April 2005;
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(ii) for the period 1 May 2006 to 30 April 2007;
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(iii) for the period 1 May 2007 to 30 April 2008.
10.SDHSL's appeal relates to a repayment in respect of overpaid VAT in the sum of £7,740,298 ("VAT Repayment 3") paid on 24 January 2005. Sums equal in amount to VAT Repayment 3 were brought into account in SDHSL's profit and loss account for the period ended 30 April 2005. Also, statutory interest in the sum of £832,628 ("Interest Payment 3")5 [was] paid in two instalments in February 2005. Sums equal to that amount were brought into the profit and loss account of SDHSL for the period ended 30 April 2005.
11.Its appeal also concerns a repayment in respect of overpaid VAT in the sum of £52,141,416 ("VAT Repayment 4") and statutory interest in the sum of £78,395,858 ("Interest Repayment 4") paid in August 2007. Sums equal in amount to VAT Repayment 4 and to £77,654,202 of Interest Payment 4 were brought into account as an exceptional item of £129,796,000 in SDHSL's profit and loss account for the period ended 30 April 2007 in the way shown at Note 3 on page 14 of the accounts. A sum equal in amount to the remaining £741,656 of Interest Payment 4 was brought into account in the profit and loss account of SDHSL for the period ended 30 April 2008.
12.Note 3(a) to SDHSL's statutory accounts for the year ended 30 April 2007 and dated 12 July 2007 states:
The VAT claim of £129.8m arose from the incorrect treatment by HMRC of commission earned by agents on orders placed for third parties. Previously, the commission was treated as consideration for the provision of services by the agent but following litigation in 2004 it was accepted as a discount off the selling price of the goods, thereby reducing the company's VAT liability. HMRC had previously refused payment of the claim on the basis that it was caught by the 3 year cap on refunds introduced in 1996 but two Court of Appeal decisions in 2006 decided that the cap was introduced unlawfully and therefore claims for earlier years were effectively unrestricted. HMRC implemented the Court of Appeal decisions by issuing a Business Brief in August 2006 inviting companies to seek repayment of claims previously rejected under the three year cap.
The repayment is subject to the company giving an undertaking that the monies will be repaid to HMRC with interest should HMRC ultimately be successful in having the Court of Appeal decisions overturned by the House of Lords. The case is due to be heard in the House of Lords in November 2007 with a decision expected early 2008. In addition to the undertaking, HMRC has sought a bank guarantee that the money will be repaid in the event of their appeal being successful.
13.SDHSL is assessed in respect of the period 1 May 2004 to 30 April 2005 on the...
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