Supreme Court

Shop Direct Group v Revenue and Customs Comrs

[2016] UKSC 7

[2016] WLR (D) 83

2015 Dec 9, 10; 2016 Feb 17

Lord Neuberger of Abbotsbury PSC, Lord Reed, Lord Carnwath, Lord Hughes, Lord Hodge JJSC

Revenue — Corporation tax — Profits, computation of — Post-cessation receipt — Taxpayer member of VAT group receiving repayment attributable to overpayment of VAT by other members of group — Taxpayer and other members each having ceased trading at time of repayment — Taxpayer assessed to corporation tax on basis of having received sum “arising from” discontinued trade not otherwise chargeable to tax — Whether charge to tax extending to person other than original trader — Income and Corporation Taxes Act 1988 (c 1), ss 103, 106

Facts

In 2003 the representative member of a VAT group comprising the taxpayer company and several other retail companies made a claim to the Revenue and Customs Commissioners for the repayment of VAT overpaid by the companies between 1978 and 1996 amounting to £125m, albeit only £200,000 of that sum was attributable to trading by the taxpayer company. At the time of the claim the trade of each of those other companies had been transferred to the taxpayer company and by 2007, when the repayment was made, all the companies in the group had been sold and the trade of the taxpayer company, namely the aggregate of all the trades which had generated the supplies on which the VAT had been originally overpaid, had been transferred to the new owners and so, in respect of the companies within the group, permanently discontinued within the meaning of section 103 of the Income and Corporation Taxes Act 1988. The representative member had itself been transferred to another group of companies and the new owners arranged for the VAT repayment to be made to a firm of solicitors as agent for the representative member. A series of transactions then followed whereby the solicitors, having received the repayment, in turn paid an equal sum to the taxpayer company’s parent company, following which an equivalent amount was recognised in the taxpayer company’s books as an inter-company receivable and so brought into account as part of its profits. In 2010 the revenue notified the taxpayer company that its corporation tax return for 2007–2008 was to be amended to include the amount of the payment in the company’s profits chargeable to corporation tax on the basis that it had been in receipt of a sum “arising from” the carrying on of a discontinued trade within section 103 which was not otherwise chargeable to tax and which was therefore income to be brought into charge under Case VI of Schedule D. The taxpayer company appealed the assessment on the ground that it had had no entitlement as against the revenue or anyone else to the repayment and that its receipt of an equivalent sum was by way of gift and so was from a new source and did not “arise from” the carrying on of a trade and that, in any event, section 103 only applied to the former trader whose trade was the source of the income. The First-tier Tribunal, however, found that the arrangement had been made as an acknowledgement that the taxpayer company was entitled to the repayment, that the taxpayer company was in fact beneficially entitled to receive and retain it, that section 103 was not confined to post-cessation receipts of the original trader and, moreover, that it was not to be disapplied by any of the provisions of section 106(1)(2) of the 1988 Act. On appeal the Upper Tribunal and the Court of Appeal each upheld that decision.

Held

Held, appeal dismissed. Section 103 made provision that sums arising from the carrying on of a trade before discontinuance were, if received after discontinuance, charged to tax under Case VI of Schedule D. It was designed to catch the “fruit” of the trade which would not otherwise be taxed. There was no restriction on who the recipient of those fruits of the trade might be and so the charge to tax was not limited to the former trader whose trade was the source of the income. Section 106 governed the charge to tax in some, but not all, of the circumstances in which the rights to receive payments which were post-cessation receipts were transferred. The effect of section 106(1) was to quantify the section 103 charge at the amount of the consideration (or the market value) of the rights to such sums in cases where the former trader transferred its rights to those future receipts for value, whereupon the subsection imposed the charge on the former trader. Section 106(2) disapplied section 103 and substituted Case I of Schedule D in cases where a trade was 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 was transferred to the company that carried on the trade thereafter. Neither subsection was applicable to the taxpayer company. Since it had been in receipt of a sum arising from the carrying on of a discontinued trade which was not otherwise chargeable to tax, it was taxable under section 103 (paras 19–26, 29–31).

Appellate History

Decision of the Court of Appeal [2014] EWCA Civ 255; [2014] STC 1383 affirmed.

Appearances

David Goldberg QC and Michael Jones (instructed by Weil, Gotshal & Manges) for the taxpayer company.

Malcolm Gammie QC and Elizabeth Wilson (instructed by Solicitor, Revenue and Customs Commissioners) for the Crown.

Reported by: Colin Beresford, Barrister