Case Comment: Shop Direct Group v Commissioners for Her Majesty’s Revenue and Customs  UKSC 7
04 Monday Apr 2016
The Supreme Court unanimously dismissed Shop Direct Group’s appeal and upheld the decisions of the First-tier Tribunal, Upper Tribunal and Court of Appeal. In doing so, the Supreme Court concluded that Shop Direct Group was liable to corporation tax on the receipt of a repayment of overpaid value added tax from Her Majesty’s Revenue and Customs.
In September 2007, Shop Direct Group received a sum of £125 million representing overpaid VAT. The receipt of such a substantial repayment came about as over several years, companies within Shop Direct Group’s VAT group had overpaid HMRC substantial sums as VAT due to an incorrect understanding of the law. HMRC later repaid the sums incorrectly paid, to a nominated member of the corporate group together with interest on those sums. Crucially, by the time the repayment was made, each of the companies which had made the relevant taxable supplies had permanently discontinued their trade.
Shop Direct Group appealed the judgments of the Court of Appeal, Upper Tribunal and First-tier Tribunal, that it is liable to corporation tax on the receipt of the overpaid VAT.
The dispute concerned the application of the Income and Corporation Tax Act 1988 (ICTA), ss 103 and 106. ICTA, s 103 states that where a trade (whose profits are chargeable to tax) has been permanently discontinued, profits arising from the carrying on of the trade before its discontinuance were, if received after the discontinuance, chargeable to corporation tax under Case VI of Sch D. Further, ICTA, s 106(1) quantifies the corporation tax chargeable pursuant to ICTA, s 103 as applying on the amount of the consideration paid when the trader transferred its rights to the future trading receipts. ICTA, s 106(2) disapplies s 103 in specified circumstances.
Shop Direct Group argued that ICTA, s 103 contained an implicit restriction, imposing a tax charge only on the original trader out of whose pre-discontinuation trade, the trade receipt arose.
Supreme Court decision
Lord Hodge, with whom Lord Neuberger, Lord Reed, Lord Carnwath and Lord Hughes agreed, gave the judgment of the court. The Supreme Court held that ICTA, s 103 does not contain an implicit restriction of this kind for three principal reasons:
- The wording of ICTA, s 103 does not necessitate any such restriction on the charge. It only requires that the relevant sums are received after the discontinuance and imposes no limit on who the recipient of the sums must be (and who is thus liable to the charge).
- The purpose of ICTA, s 103 is to prohibit otherwise taxable sums escaping tax as a result of the permanent discontinuance of trade. Lord Hodge interpreted the provision as charging “the fruit of the discontinued trade” not only in the hands of the former trader, his personal representatives and heirs, but also in the hands of the holders to whom the rights to the post-cessation receipts have been assigned.
- Neighbouring ICTA provisions draw an express distinction between “a person chargeable to tax” and “a person who had previously carried on the trade”. The court inferred that Parliament had not intended that the ICTA, s 103 charge should fall only on the former trader as, otherwise, there would have been no need to distinguish between “any person” on one hand and “the former trader” on the other.
With regard to ICTA, s 106, the court held that subsection (1) only applied when the former trader transferred its rights to future receipts for value. Thus, on the facts, ICTA, s 106(1) was not relevant as there was no suggestion that the rights to receive the VAT repayment had been transferred for value.
Lastly, the court construed ICTA, s 106(2) as only applying where a trade is treated as having been discontinued by reason of a change of the persons carrying it on and, at the same time, the right to receive the post-cessation receipts of the trade is transferred to the new company that carries on the trade thereafter. Again, having considered the facts, the court held that subsection (2) did not apply because none of the repayments in question were made to the company who Shop Direct Group’s trade was transferred to.
It should be noted that the periods covered by this appeal predate the Corporation Tax Act 2009 and the judgments thus reference the legislation in force at the time. Nevertheless, the decision is likely to be of relevance to the rewritten provisions, as they are substantially similar. Unsurprisingly the Supreme Court did not allow a large category of post-cessation receipts to escape a charge to tax merely because they were received by a different trader to the original trader. Nevertheless, the judgment gives some useful direction on how to interpret the relevant legislation on post-cessation trade receipts. It also underlines that, when considering a claim for a VAT repayment, it is important to bear in mind that there could be tax consequences to a successful outcome.