Case Preview: Shop Direct Group v Commissioners for Her Majesty’s Revenue and Customs
06 Wednesday Jan 2016
The taxpayer received a VAT repayment of £125 million from HMRC in September 2007 together with statutory interest of £127 million. This large repayment arose due to a number of overpayments made by the taxpayer and other companies in the taxpayer’s VAT group during the VAT periods between 1978 and 1996.
HMRC’s view is that repayments of VAT arising from a change of view as to legal obligations of the taxpayer are non-gratuitous sums that would have formed part of the taxpayer’s trade receipts if those sums had been properly accounted for. As such, they are taxable. Difficulties arose in this case because, during the course of the original VAT overpayment and the repayment by HMRC, the taxpayer’s VAT group changed significantly due to the sale of various group subsidiaries, name changes, and transfers and cessations of trade. Further, following the repayment by HMRC, the received moneys were passed on to members of the taxpayer’s VAT group. The question thus arose whether repayments are taxable if they were received by companies that were not the ones that made the original taxable supplies.
HMRC assessed the taxpayer to corporation tax on both the overpayments and the interest. The taxpayer appealed, arguing that the sums that were passed to other members of the VAT group were gifts rather than trade receipts.
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.
The First-tier Tribunal held that the companies receiving refunds received them in satisfaction of an entitlement rather than as gifts. Even where a company that received the repayment no longer carried on the trade, the repayment was a post-cessation receipt (under the Income and Corporation Taxes Act 1988, s 103(1)) and was therefore taxable.
Due to the overpayments themselves being entitlements, the tribunal found that the overpayments constituted a money debt falling within the loan relation rules contained in the Finance Act 1996. It thus held that the Interest was taxable under these rules.
The Upper Tribunal dismissed the appeal and upheld the first instance decision, restating that the payments arose from the original overpayment of VAT, which in turn arose from the relevant trade and was thus a trade receipt. Shop Direct appealed the decision to the Court of Appeal.
Court of Appeal Decision
Giving the leading judgment for the court, Lord Justice Briggs held that the overpayment was taxable because s. 103(1) imposes a charge to tax upon any recipient of a post-cessation receipt, regardless of whether that recipient is the original trader or not. He presented the following four reasons:
- S. 103(1) and (2) do not contain any restrictions relating to the identity of the recipient;
- The language in section 106 assumes a wider ambit, in terms of the person chargeable under s. 103, than s. 103 only being applicable to the original trader;
- The history of s. 103 demonstrated that the section cannot, as originally enacted, have been intended to be restricted in the way that the appellants contended; and
- A restriction of the charge in s. 103(1) to receipts by the original trader would leave substantial classes of post-cessation receipts untaxed and it is unlikely that this was intended.
In regards to the interest, in Lord Justice Briggs’ judgment, HMRC had a statutory obligation to repay the overpayment and the overpayment is thus, from the perspective of the recipient, a money debt. Crucially, it was held that at the time of the payment of the interest, the appellant stood in the position of a creditor in respect to this money debt (Finance Act 1996, s 100 (1)(a)). This was evidenced by the written agreement made between the appellant and HMRC which expressed HMRC’s contractual obligation to pay the overpayment and the interest to the appellant. Therefore, the Finance Act 1996, s.80 applied and the appellant was liable to corporation tax on the Interest due to it being “profits and gains arising to a company from its loan relationships”.
Supreme Court appeal
Even though all three courts have so far held that both payments made by HMRC are taxable to corporation tax, the Shop Direct Group was granted leave to appeal by the Supreme Court. Starting on 9 December 2015 the case was heard over two days by a panel of five, consisting of Lord Neuberger, Lord Reed, Lord Carnwath, Lord Hughes and Lord Hodge. The hearing can be viewed on demand on the Supreme Court’s website.