The nice people at Tax Journal have recently published a summary of Tax cases that went to court or to a Tax Tribunal for the first 6 months of 2015, especially those with wider implications such as, ‘what constitutes a reasonable excuse’.
The first tranche cases involving ‘reasonable excuses’, was posted on 21st July, I’m sure that the rest will also be of interest to you:
1. Malcolm Healey v HMRC
Mr Healey as part of his investments had purchased commercial securities issued by a bank and from which the interest coupons had been stripped. The price paid by Mr Healey was lower, to reflect the low return on the coupons. The interest coupons were later reattached to the notes, which Mr Healey then sold on the market for their full market price. This provided him with an after-tax return much higher than on a fixed-term deposit.
HMRC had ruled that the full market price should have been used as the basis for the taxpayers calculation of his tax liability, Mr Healey disagreed and appealed to the Tax Tribunal.
The Upper Tribunal (UT) found that the discount was clearly not intended to compensate Mr Healey for any capital risk, but rather the purpose of the discount was to compensate Mr Healey for the absence of interest and as such constituted income. As a result they found for HMRC.
Wider implications: The UT focused on the acquisition of the notes at a discount, rather than on their disposal at a profit, and ruled that the discount was of an income nature and therefore taxable.
2. HMRC v Colaingrove
Colaingrove provide serviced chalets and static caravans at holiday parks. The issue was whether the provision of electricity by Colaingrove to holiday makers should be taxed at a reduced rate of VAT, despite the fact that the charge for electricity was an element of a single charge for serviced accommodation taxed at the standard rate.
The UT found for HMRC and said there was a distinction between the provision of electricity in a verifiable amount and the provision of a fixed charge irrespective of use.
Wider implications: So not only will holiday makers see their charge go up, there are clear implications for landlords with multi-occupancy and possibly B&B’s with long-term guests.
3. Pendragon V HMRC
The object of Pendragon’s scheme was to ensure that companies in a car distributor group were able to recover Input Tax incurred on the price of new cars acquired as demonstrator cars, while avoiding the payment of Output Tax on the sale of these cars to consumers; not surprisingly HMRC disagreed and considered the scheme to be abusive tax avoidance under the ‘Halifax Principle’ (see notes below).
The Supreme Court found that the scheme did come under the ‘Halifax Principle’ as it had the essential aim of obtaining a tax advantage. Two steps had been inserted which had had no commercial rationale other than the achievement of a tax advantage; firstly, the leasing of the cars by Pendragon to ensure that the rights were assigned under a HP or conditional sale agreement: and secondly, that sale of those rights had been done as part of business assets transferred as a going concern to a third party.
Wider implications: The court highlighted the difficulty of the Halifax principle and the assumption that the principle will not apply to ‘normal commercial transactions’, which will not now be the case.
4. Littlewoods Ltd v HMRC
This case follows on from a case I highlighted last year in which Littlewoods argued that they had paid VAT which was not due, which they won. HMRC had repaid the principal amount together with simple interest, but Littlewoods claimed that it was also entitled to compound interest.
The Court of Appeal found that as the only cause of action available to the taxpayer for the repayment of VAT was to take HMRC to court, that this excluded common law claims for interest and that compound interest was therefore applicable.
Wider implications: I suspect that HMRC will appeal to the Supreme Court as £1.2bn in compound interest is involved and it opens the door to other taxpayers claiming compound interest, which could cost the Revenue a huge amount. But before you get carried away, the judgement also stated that a claim must display “exceptional circumstances”, in order to support the case for compound, rather than simple, interest.
5. HMRC v Southern Cross
In this case HMRC had paid £1.4m to Southern Cross for repayment of VAT and interest and now sought to recover it. Southern Cross contended that the repayment had been made under a binding contract and could not now be reclaimed.
The case arose from an earlier dispute where Southern Cross supplied dental nurses to dental practices and treated the supply as exempt rather than standard rated (SR). HMRC had deemed the supply at first SR but later agreed in writing that the supply was exempt and repaid £1.4m VAT.
Sometime later as a result of a different tribunal case, that dealt with similar issues, HMRC had reversed its decision a second time and asked Southern Cross for the money back. However, the UT found that HMRC’s written agreement with Southern Cross when it repaid the VAT, constituted a contract and found for Southern Cross..
Wider implications: The case is interesting because it confirms that when HMRC enter into agreements, that such agreements are binding even if the position agreed by HMRC is then judicially found to be wrong
6. Michael Wood (Deceased) v HMRC
On 2 June 2010, Mr Wood, a dentist, had attempted to make a voluntary disclosure to HMRC about undeclared income, in return for reduced penalties. HMRC had ruled that Mr Wood was not eligible for the reduced penalty scheme, as cases were fraud is suspected are excluded. Following a meeting with HMRC, Mr Wood had agreed to commission a disclosure report into his tax affairs by September 2011, but had not done so because of ill-health and HMRC had issued assessments against which Mr Wood had appealed. Mr Wood then suddenly died.
His widow contended that she would not be able to contest HMRC’s allegations of deliberate behaviour by her husband now that he had died. Therefore, requiring her to contest the disputed assessments would be in breach of the Convention on Human Rights art 6 (right to a fair trial) and would be contrary to the overriding objective of the Tribunal under Tribunal Procedure Rules.
The Tribunal ruled that the disputed assessments had been raised on a protective basis because the disclosure report had been delayed, and the liabilities under those assessments had crystallised before Mr Wood’s death and were therefore payable.
Wider implications: The Tribunal recognised that it was required to apply a very ‘blunt tool’ to a ‘delicate situation’. However, it felt that the litigation must follow its course, starting with the submission of the disclosure report; and whilst it upheld the assessments it did however remove the penalties.
NOTES – the ‘Halifax Principle’
This is a case which first went to court in 2006 and eventually ended up as a landmark judgement in the European Court of Justice, as for the first time the principle of abuse of rights as applied to VAT, was recognised.
The case centred on Halifax bank, which set up a separate company to facilitate the building of a call centre. The arrangements were designed to enable the Halifax to reclaim more VAT than it would be entitled to claim if it paid for the construction directly.
The Court ruled that under the ‘abuse of rights’ principle, the structure put in place by the banking group was abusive and Halifax should not gain from the artificial arrangement to recovering additional input tax. The Court further ruled that only when the avoidance is so extreme will a scheme be deemed an abuse.
English law, and the UK courts, have always taken a literal approach to interpreting legislation of any sort. This is particularly the case with tax legislation, which can be extremely complex, and the literal spirit guides the judiciary in applying tax law to appeal cases. This of itself does not create an avoidance industry, but it certainly does allow it to flourish, as those designing tax avoidance schemes need only to establish that their plans exploit the letter of the law to the benefit of the taxpayer. This judgement changes that.
If any of you would like more detailed information on any aspect of Important Tax Cases 2015, send me an e-mail and I’ll be pleased to advise further.