Shop Direct Group v Revenue and Customs Commissioners

JurisdictionEngland & Wales
JudgeLord Carnwath,Lord Hughes,Lord Neuberger,Lord Hodge,Lord Dyson,Lord Kerr,Lord Reed
Judgment Date01 February 2017
Neutral Citation[2016] UKSC 7
Date01 February 2017
CourtSupreme Court

[2016] UKSC 7

THE SUPREME COURT

Hilary Term

On appeal from: [2014] EWCA Civ 255

before

Lord Neuberger, President

Lord Reed

Lord Carnwath

Lord Hughes

Lord Hodge

Shop Direct Group
(Appellant)
and
Commissioners for Her Majesty's Revenue and Customs
(Respondent)

Appellant

David Goldberg QC Michael Jones

(Instructed by Weil, Gotshal & Manges)

Respondent

Malcolm Gammie QC Elizabeth Wilson

(Instructed by Her Majesty's Revenue & Customs Solicitor's Office)

Heard on 9 and 10 December 2015

Lord Hodge

(with whom Lord Neuberger, Lord Reed, Lord Carnwath and Lord Hughes agree)

1

This appeal concerns the interpretation of sections 103 and 106 of the Income and Corporation Taxes Act 1988 (" ICTA") which imposed a charge to corporation tax on post-cessation receipts from a trade, profession or vocation. The provisions were later rewritten in the Corporation Tax Act 2009. The receipts in question came about as follows. Over many years companies within the Littlewoods corporate group paid the Commissioners for Her Majesty's Revenue and Customs ("HMRC") substantial sums as value added tax ("VAT") on an incorrect understanding of the law. HMRC later repaid the sums, which had been incorrectly paid, to a nominated member of the corporate group together with interest on those sums as required by sections 78 and 80 of the Value Added Tax Act 1994 (" VATA 1994"). At earlier stages in the proceedings, the dispute concerned HMRC's claim to tax several companies within the group on both repayments and also interest on those repayments, which in aggregate amounted to over £630m. Now the only question is whether a repayment of overpaid VAT of £124,963,600 is liable to corporation tax in the hands of the appellant, Shop Direct Group ("SDG").

2

SDG challenges the judgment of the Court of Appeal, upholding the determinations of the First-tier Tribunal and the Upper Tribunal, that it is liable to corporation tax on the receipt of that sum.

The prior law
3

In order to understand the purpose of sections 103 and 106 of ICTA it is necessary to look at the prior law. In short, until Parliament intervened by enacting sections 32–34 of the Finance Act 1960, sums which a taxpayer received as income from his trade, profession or vocation after he had ceased to trade or carry on his profession or vocation escaped taxation. Case law established that the sums did not change their character after the discontinuance; their source was unchanged. The courts treated those sums as "the fruit" of the trade or profession or as its "fruit or aftermath". The sums were held not to be taxable under Cases I or II of Schedule D because the trade, profession or vocation was not being carried on in the tax year in which the sums were received. As a result, an astute taxpayer might choose to retire so that he received such income post-cessation and thus tax-free. Similarly, as the case law shows, if the taxpayer were unfortunate and died before he had received income arising from his trade, profession or vocation, the receipts were not taxed as income in the hands of his personal representatives, heirs or assignees.

4

In 1930 Rowlatt J set out the basic principle in Bennett v Ogston (1930) 15 TC 374, in a passage which the House of Lords approved in the later cases to which I refer below. He said (at p 378):

"When a trader or a follower of a profession or vocation dies or goes out of business … and there remain to be collected sums owing for goods supplied during the existence of the business or for services rendered by the professional man during the course of his life or his business, there is no question of assessing those receipts to income tax; they are the receipts of the business while it lasted, they are arrears of that business, they represent money which was earned during the life of the business and are taken to be covered by the assessment made during the life of the business, whether that assessment was made on the basis of bookings or on the basis of receipts."

Thus in Brown v National Provident Institution [1921] AC 222 the tax-paying companies escaped tax on profits derived from transactions conducted in the preceding year because they did not carry on the trade in the tax year in which they received the profit-generating sums. In Stainer's Executors v Purchase [1952] AC 280, 23 TC 367, after the actor and film producer, Leslie Howard had been killed by enemy action in 1943, his executors received income from films, which he had produced or in which he had acted. The Crown argued that the sums had assumed a different character after his death and could no longer be treated as profits and gains of his profession. The House of Lords rejected this argument and held that the source of the payments was Mr Howard's professional activity. Lord Simonds stated (at p 289) that "they retained the essential quality of being the fruit of his professional activity" and Lord Asquith of Bishopstone (at p 290) described the payments as "the fruit or aftermath of the professional activities of Mr Leslie Howard during his lifetime". The House of Lords confirmed this approach in relation to royalties received after the death of an author in Carson v Cheyney's Executor [1959] AC 412.

5

Tax legislation thus left the door wide open to tax avoidance so long as the taxpayer could, by choosing when to discontinue a business, escape tax on post-cessation receipts.

The statutory provisions
6

Parliament sought to close that door by enacting the predecessors of the provisions which are the subject of this appeal, initially in sections 32–34 of the Finance Act 1960, and imposed a charge to tax on post-cessation receipts primarily under Case VI of Schedule D. Later, sections 103 to 110 of ICTA became the relevant provisions for both income tax and corporation tax. Since the statutory provisions relating to income tax were separated from those relating to corporation tax in 2005, the ICTA provisions were amended to relate only to corporation tax. Section 103 of ICTA, as it was worded in 2007–2008 at the time of the relevant transaction, stated so far as relevant:

"(1) Where any trade, profession or vocation carried on wholly or partly in the United Kingdom the profits of which are chargeable to tax has been permanently discontinued, corporation tax shall be charged under Case VI of Schedule D in respect of any sums to which this section applies which are received after the discontinuance.

(2) Subject to subsection (3) below, this section applies to the following sums arising from the carrying on of the trade, profession or vocation during any period before the discontinuance (not being sums otherwise chargeable to tax) —

(a) where the profits for that period were computed by reference to earnings, all such sums in so far as their value was not brought into account in computing the profits for any period before the discontinuance, and

(b) where the profits were computed on a conventional basis (that is to say, were computed otherwise than by reference to earnings) any sums which if those profits had been computed by reference to earnings, would not have been brought into the computation for any period before the discontinuance because the date on which they became due, or the date on which the amount due in respect thereof was ascertained, fell after the discontinuance." (emphasis added)

In this case sub-section (2)(a) is relevant as the trading companies computed their profits by reference to earnings.

7

The only other provision which it is necessary to set out is section 106 of ICTA (as amended by section 882 of, and paragraph 85 of Schedule 1 to, the Income Tax (Trading and Other Income) Act 2005) which governs the charge to tax in some, but not all, of the circumstances in which the rights to receive payments which are post-cessation receipts are transferred. Section 106(1) addresses the circumstance of a transfer for value and provides:

"Subject to subsection (2) below, in the case of a transfer for value of the right to receive any sum to which section 103, 104( 1) or 104(4) applies, any corporation tax chargeable by virtue of either of those sections shall be charged in respect of the amount or value of the consideration (or, in the case of a transfer otherwise than at arm's length, in respect of the value of the right transferred as between parties at arm's length), and references in this Chapter … to sums received shall be construed accordingly."

The subsection quantifies the charge to tax on the transferor of the right. Thus, for example, if a company, which was entitled to receive royalties from films or books, permanently discontinued its business and assigned the right to receive those royalties to a third party at full market value, the assigning company would be liable to corporation tax under section 103 on its profits calculated by reference to the value it received as consideration for the assignment.

8

Subsection (2) of section 106 addresses the circumstance where, under sections 110(2)(a) and 337 of ICTA, there is a deemed discontinuance of a trade caused by a change in the persons carrying on the business. It provides:

"Where a trade, profession or vocation is treated as permanently discontinued by reason of a change in the persons carrying it on, and the right to receive any sum to which section 103 or 104(1) applies is or was transferred at the time of the change to the company carrying on the trade, profession or vocation after the change, corporation tax shall not be charged by virtue of either of those sections, but any sum received by that company by virtue of the transfer shall be treated for corporation tax purposes as a receipt to be brought into the computation of the profits of the trade, profession or vocation in the period in which it is received."

So, if the transferee, while it is carrying on its trade, receives sums which are...

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