October 29th, 2013
10 recent tax cases that matter
While every attempt will be made to ensure that information provided is accurate at the time of publication, it should be treated as guidance only and does not constitute legal or professional advice. Tax law and guidance changes frequently and readers are advised to consult the current relevant publication for the most up-to-date information on this topic.
This selection provides summaries of 10 of the most important recent tax cases, taken from Tax Journal's weekly case summaries of the 'tax cases that matter'.
Here are 10 of the most important recent decisions
University of Huddersfield Higher Education Corporation v HMRCWhether leaseback transaction was an 'abusive practice'In University of Huddersfield Higher Education Corporation v HMRC (No. 2) (TC02823 – 15 August), a university, which was partly exempt, implemented a scheme with the objective of recovering the whole of the input tax incurred in refurbishing a derelict mill (which it opted to tax). The scheme involved the creation of a discretionary trust, the grant of a 20-year lease of the mill to the trust, and a leaseback by the trust to the university. The creation of the trust and the grants of the lease and underlease all took place on the same day. Customs issued an assessment on the basis that the lease and leaseback were not effective for VAT purposes (so that most of the input tax should be attributed to the university's exempt supplies). The university appealed. The VAT Tribunal referred the case to the CJEU, which held (CJEU Case C-223/03;  STC 980) that 'the question whether the transaction concerned is carried out for the sole purpose of obtaining a tax advantage is entirely irrelevant in determining whether it constitutes a supply of goods or services and an economic activity', although 'the Sixth Directive precludes any right of a taxable person to deduct input VAT where the transactions from which that right derives constitute an abusive practice'. The CJEU held that the transactions in question constituted supplies of goods or services and an economic activity provided that 'they satisfy the objective criteria on which those concepts are based, even if they are carried out with the sole aim of obtaining a tax advantage, without any other economic objective'. Following the CJEU decision, the FTT reheard the case and allowed the university's appeal. Judge Demack held that the leaseback arrangement had not been abusive, applying the principles laid down by the CJEU decision in HMRC v Weald Leasing Ltd, CJEU Case C-103/09;  STC 596.
Why it matters: The FTT rejected HMRC's contention that the scheme adopted in this case, involving the creation of a discretionary trust and a leaseback arrangement, was an 'abusive practice'. HMRC have already appealed to the Upper Tribunal against this decision.
Gary Barnett (senior PSL, tax, Simmons & Simmons), said: 'Two aspects of the case are likely to be the focus of HMRC's appeal. First, the tribunal's assessment of the scheme as only a VAT deferral scheme with a built-in feature that allowed an absolute VAT saving at a later date will no doubt be attacked by HMRC, given the finding of the tribunal that it accepted that "from the outset it was the university's intention to make an absolute tax saving". HMRC may well argue that this feature of the scheme should be regarded as sufficient to make it contrary to the purposes of the VAT rules from the outset. Secondly, the tribunal rejected the argument that the university's intentional use of an unconnected trust as lessee, rather than a subsidiary, to prevent the application of the UK's anti-avoidance provisions which would otherwise have disapplied the option to tax, was sufficient to engage the principle of abuse of law. In Weald Leasing, the CJEU indicated that the involvement of an intermediate third party might be sufficient to engage the principle of abuse, where the involvement of the third party was to prevent the application of domestic anti-avoidance provisions which would have required VAT to be accounted for on arm's length values. Accordingly, HMRC may well wish this issue to be reconsid
Rapid Sequence Ltd v HMRCCompany supplying locum doctors to hospitalsIn Rapid Sequence Ltd v HMRC (TC02826 – 22 August), a company (R) supplied medical doctors to hospitals on a locum basis. HMRC issued a ruling that it was required to account for tax on its supplies. R appealed, contending that its supplies should be treated as exempt under VATA 1994 Sch 9 Group 7 item 5. The FTT rejected this contention and dismissed the appeal.
R Baker v HMRCCompany purchasing own shares: whether void
In Rapid Sequence Ltd v HMRC (TC02826 – 22 August), a company (R) supplied medical doctors to hospitals on a locum basis. HMRC issued a ruling that it was required to account for tax on its supplies. R appealed, contending that its supplies should be treated as exempt under VATA 1994 Sch 9 Group 7 item 5. The FTT rejected this contention and dismissed the appeal. Judge Herrington held that although R's supplies appeared to fall within the wording of Item 5, that provision had to be interpreted in accordance with article 132(1)(c) of Directive 206/112/EC, and that R's services did not amount to 'medical care' within article 132(1)(c). Item 5 had to be given 'a conforming construction so that it is consistent with the UK's obligation not to grant an exemption which goes beyond the permitted scope of the exemption in article 132(1)(c)'. Therefore, item 5 should be construed as referring to 'the provision of medical care services provided by a deputy', rather than simply to 'the provision of a deputy'.
Why it matters: This is an important victory for HMRC because the FTT accepted that, on a literal construction of the UK legislation, the company's supplies qualified for exemption. However, the tribunal upheld HMRC's contention that the UK legislation should not be read literally, but that the scope of the exemption should be restricted by treating the UK legislation as if it included additional wording to bring the scope of the exemption into line with the wording of Directive 2006/112/EC. It has for many years been accepted that a taxpayer can rely on the provisions of an EC Directive to override the UK legislation, but this appears to be the first case where that principle has been applied in favour of HMRC, denying the taxpayer the benefit of an exemption which the UK legislation, read in isolation, would appear to provide
P McMahon v HMRCSole trader: costs of defending action taken by former employer
In P McMahon v HMRC (TC02799 – 2 August), an individual (M) had been employed as a recruitment consultant by a company (Q). In April 2007, he left Q and became self-employed. Subsequently, Q began legal proceedings against him, claiming that he had breached an undertaking not to contact or canvass any of Q's clients. The proceedings were settled by a 'Tomlin order', under which M agreed to pay Q £100,000 in settlement of Q's claims. In his 2007/08 tax return, M claimed a deduction for this payment, together with his legal costs. HMRC rejected the claim on the basis that the expenditure had not been wholly and exclusively incurred for the purpose of M's business. The FTT dismissed M's appeal. Judge Cannan held that the expenditure had a dual purpose, and that one of the purposes had arisen out of M's contract of employment. Accordingly the expenditure was not wholly and exclusively for the purpose of M's business.
Why it matters: The FTT upheld HMRC's contention that the damages which the appellant had agreed to pay his former employer were not wholly and exclusively for the purposes of his business.'
HMRC v HealyActor, temporary accommodation, whether expenditure deductible
In HMRC v Healy (Upper Tribunal – 31 July), a professional actor (H), who lived in Cheshire with his wife, accepted a role in a play at a London theatre. He rented a flat which was just over a mile from the theatre. He claimed a deduction of £32,503 in respect of the rent of the flat, and also claimed deductions of £8,174 in respect of travelling (by taxi) and subsistence (meals in restaurants). HMRC rejected the claim and H appealed. The First-tier Tribunal (FTT) held that the expenditure on restaurant meals was not wholly and exclusively for the purpose of his profession, and H had not submitted sufficient evidence in support of his claim for taxi fares, so these items were not deductible. With regard to the rent of the flat, Judge King allowed H's appeal but the Upper Tribunal remitted the case for rehearing, observing that 'the FTT needed to consider whether in all the circumstances of the case, the sole purpose for renting the flat was in order to carry on his profession of an actor'. If that had been H's sole purpose, the expenditure would be deductible, but if H had had a dual purpose, the expenditure would not be deductible.
Why it matters: The Upper Tribunal held that the FTT had erred in law, and remitted the case for rehearing. Part of the Upper Tribunal decision appears to suggest that the actor's 'subjective purpose' should be conclusive, although this suggestion appears to be inconsistent with the House of Lords decision in the well-known case of Mallalieu v Drummond  STC 665, where the majority of the HL held that Miss Mallalieu's subjective purpose was not conclusive.
P Duckmanton v HMRCSole trader: costs of defending manslaughter charge
In P Duckmanton v HMRC (Upper Tribunal – 15 July), a sole trader (D) operated a vehicle transport business. In 2002, one of his lorries killed a pedestrian. D was charged with manslaughter and attempting to pervert the course of justice. He was subsequently convicted of attempting to pervert the course of justice, but was acquitted of manslaughter. In his returns, he claimed a deduction for the legal costs of defending himself. HMRC issued amendments disallowing the deductions, and D appealed. The First-Tier Tribunal (FTT) dismissed his appeal, holding that the expenses were not wholly and exclusively incurred for the purposes of D's trade. Judge Connell held that D's 'main purpose in incurring significant expenditure on legal and other professional fees was to defend the manslaughter charge for the purpose of protecting his liberty and personal reputation'. The Upper Tribunal upheld this decision as one of fact. .
Why it matters: The costs of defending a manslaughter charge had not been wholly and exclusively incurred for business purposes, and were not an allowable deduction in computing the trader's profits.
Tower Radio Ltd v HMRCAvoidance scheme involving restricted securities: application of Ramsay principle
In Tower Radio Ltd v HMRC (and related appeal) (TC02784 – 18 July), a company (T) entered into a tax avoidance scheme, devised by an accountancy firm, involving the award of restricted shares in a subsidiary company to its managing director (L), with the aim of paying him a substantial bonus without incurring any liability to PAYE or NIC. The subsidiary company was subsequently liquidated, and its assets were distributed to L. HMRC issued determinations charging PAYE and NIC. The FTT dismissed T's appeal, specifically distinguishing the Upper Tribunal decision in UBS AG v HMRC (No. 2)  STC 68. Judge Kempster observed that the UBS case 'involved several hundred employees of multinational services companies', whereas in the present case there was 'a very close identity' between T and L, and it was L himself who had decided to implement the scheme. The only aim was to extract the 'surplus cash' from T, and the only rationale for the subsidiary company 'was to put money in and then strip it out again as soon as possible thereafter'. Applying the principles laid down in WT Ramsay Ltd v CIR  STC 174, the restricted securities and the subsidiary company should be disregarded, and 'the only coherent analysis of the transaction is that the surplus cash of the employer was paid to the relevant employees'.
Why it matters: There was a great deal of money at stake in this case, which was treated as a lead case for several other companies which have adopted similar schemes. The FTT upheld HMRC's contention that the scheme was within the Ramsay principle, with the result that the interposition of a subsidiary company and the use of restricted securities should be disregarded, and the transactions should be treated as the payment of emoluments which were within the scope of PAYE and NIC.
Commenting on the decision, Philip Fisher (BDO) observed: 'Anybody who has been involved in PAYE and NIC avoidance schemes over the past ten or so years will now need to consider whether the broad Ramsay principle might be invoked. It is now too late for them to do anything other than hope for the best. Those introducing similar schemes today should bear in mind yet another adverse tribunal decision based on a purposive interpretation of legislation. This means that taking advantage of loose wording in tax law is now even more likely to be frowned upon and rejected by both HMRC and the courts.'
Project Blue Ltd v HMRCSDLT anti-avoidance in FA 2003 s 75A
In Project Blue Ltd v HMRC (TC02777 – 12 July), a Guernsey company (P) agreed in 2007 to purchase the freehold of a large army barracks from the Ministry of Defence. In January 2008 P entered into a sale and leaseback agreement with a Qatari financial institution (M). Two days later M and P entered into put and call options requiring or entitling P to repurchase the freehold at the end of a 'finance period' (of 999 years and 2 days); the Ministry of Defence conveyed the freehold to P; P conveyed the freehold to M, and M leased the property back to P for the 'finance period'. On the following day P granted a 999-year lease to an associated company. P failed to account for SDLT on its acquisition of the property. HMRC began an enquiry, and issued an amendment on the basis that SDLT was chargeable on consideration of £959m. P appealed. HMRC subsequently issued an amendment to its statement of case, contending that the effect of FA 2003 s 75A(5) was that the chargeable consideration had in fact been £1.25bn (the amount paid by M to P for the subsale of the freehold). The FTT upheld HMRC's amended statement of case, holding that the effect of FA 2003 s 75A was that P was chargeable to SDLT in respect of a notional land transaction, and that the chargeable consideration in respect of that notional land transaction had been £1.25bn. The tribunal also accepted HMRC's contention that the effect of s 75A(5) was that SDLT was due on the amount which the appellant received for its subsale of the freehold. The fact that the first officer to review the case had apparently overlooked the effect of this provision, and had sought to charge SDLT on a lesser sum, did not give rise to any estoppel against HMRC. The FTT accepted HMRC's contention that the scheme which was adopted in this case fell within the scope of FA 2003 s 75A, and that SDLT was chargeable accordingly.
Why it matters: This is understood to be the first case to consider the application of the anti-avoidance provisions in FA 2003 s 75A. According to George Cotterell (Macfarlanes): 'There are two aspects of this judgment that will be of concern. First, the tribunal declined to read a motive defence into the legislation (although whether or not there was tax avoidance was not completely irrelevant). Second, the tribunal confirmed that HMRC has no discretion in determining when s 75A should apply and cannot decide not to pursue transactions they consider to be commercially motivated'. The tribunal did, however, find some limitations to the operation of s 75A.
I Menzies v HMRCLate notification of appeal to tribunal: TMA 1970 s 49H
In I Menzies v HMRC (TC02775 – 12 July), an employee (M) lodged an appeal in February 2009 against a notice from HMRC rejecting a claim to seafarers' earnings deduction. In April 2009 M moved to the USA, without informing HMRC. On 29 April 2009 HMRC wrote to M's UK address stating that, following the introduction of the new tribunal system, 'you have until 18 May 2009 to have requested either an independent review of your appeal by HMRC or have made an application directly to the Tribunal Service'. On 27 May 2009 HMRC again wrote to M's UK address, purporting to agree the appeal. In March 2012 M returned to the UK. In December 2012, M wrote to HMRC stating that he was appealing against the tax allegedly owed. HMRC treated this as an appeal against their letter of 27 May 2009, and declined to accept it. M then lodged an appeal with the First-tier Tribunal. Judge Ruthven Gemmell issued a direction under TMA 1970 s 49H(3) that the substantive appeal should proceed. He observed that, although HMRC had offered a review under TMA 1970 s 49C, M had not accepted this, and that HMRC had failed to make any further enquiries as to M's intentions.
Why it matters: This case is worth noting because the FTT specifically rejected HMRC's contention that the effect of TMA 1970 s 49C was that the appeal should be deemed to have been settled on account of the appellant's delay in pursuing it. The tribunal observed that the appellant had changed his address, and directed that he should be treated as having notified his appeal to the tribunal under TMA 1970 s 49H.
S Kutcha v HMRC (and related appeal)Scholarships to sons of company director
In S Kutcha v HMRC (and related appeal) (TC02769 – 5 July), a company made payments to two sons of one of its directors (K) while they were at university. HMRC issued assessments on K, charging tax on the basis that the payments were taxable benefits. The First-tier Tribunal dismissed K's appeal, holding that the payments were taxable by virtue of ITEPA 2003 s 212. (The tribunal also upheld determinations charging NIC.)
Why it matters: ITEPA 2003 s 212 provides that 'a scholarship which is provided for a member of an employee's family or household is to be regarded ... as provided by reason of the employment' and as a taxable benefit. The FTT upheld HMRC's view that the effect of this provision was that the payments made to the director's sons were taxable benefits.