The case concerned claims made by certain investment trust companies (“ITCs”) for refunds of VAT which they had paid to investment managers on the supply of management services, which later turned out not to be due since the supplies in question were exempt under EU law.
On discovering that the VAT was not in fact due, the investment managers made statutory refund claims and then passed on the refunded VAT and interest to the ITCs. Such statutory claims were however (1) subject to a three year limitation period and (2) incapable of recovering the input VAT which the managers had deducted from the amounts paid on to HMRC. The ITCs therefore did not receive the full amount of the VAT that they had been charged and, as a result, brought claims in unjust enrichment against HMRC claiming that they should be able to recover the gross amount of VAT paid and that their claims should not be limited to the three year statutory period.
The Supreme Court held that the ITCs’ claims in respect of the input tax failed and that HMRC’s enrichment was limited to the amount which they had actually received from the investment managers. The enrichment did not include the amounts retained as input tax credits since the supplies should have been exempt, and so there had been no entitlement to deduct input VAT. The Court went on to hold that the ITCs had, in any event, been unable to make out a claim in unjust enrichment since there had been no direct transfer of funds from them to HMRC and, therefore, HMRC’s enrichment could not be said to have been at their expense. As a result, the ITCs’ claims for VAT paid outside of the three year statutory period also failed. Finally, the Court held that the statutory repayment scheme created an exhaustive code of remedies and, as such, was effective in excluding any common law claims which the ITCs may otherwise have had.
This article appears in the JHA April 2017 Tax Newsletter, which also features:
The Supreme Court has made a reference to the Court of Justice of the European Union (“Court of Justice”) concerning the allowable proportion of residual input tax (i.e., general business overheads not directly attributable to particular supplies) attributed to hire purchase transactions. The background to the dispute is that Volkswagen Financial Services (“VFS”) provided hire purchase (“HP”) finance for the sale of vehicles manufactured by the Volkswagen Group. HP supplies comprise exempt supplies of finance and taxable supplies of cars. In December 2007 HMRC agreed to a new updated version of a (sectorised) partial exemption special method (“PESM”) for determining the deductible proportion of residual input tax, but HMRC disagreed with VFS’s proposed methodology for its retail sector, under which its HP supplies fall. VFS argued for a transaction-count method, which had the effect of splitting the residual input tax 50/50 (because each HP supply consisted of two separate supplies, as indicated above). HMRC maintained that overheads were all attributable to the exempt supplies of finance. VFS’s argument was successful in the First-tier Tribunal (“FTT”) and Court of Appeal.
HMRC’s position is based upon an argument that the overhead costs have been incorporated only into the price of the exempt supplies of finance (in a typical HP transaction there will be no mark-up on the taxable supply of the vehicle).
The questions referred to the Court of Justice ask (1) whether a taxable person has a right to deduct any of the input VAT on general overhead costs attributed to HP transactions where they have been incorporated only into the price of the exempt supplies of finance and (2) whether it can be legitimate in principle to ignore the value of the taxable supplies of cars or their value for the purposes of arriving at a PESM (provided for by Article 173(2) of Council Directive 2006/112/EC).
These are questions of fundamental importance on how the concept of “direct and immediate link” should be construed. The Supreme Court also decided a secondary issue between the parties concerning HMRC’s alternative argument that it had a fall-back position on the amount of apportionment (lower than 50%) that the FTT had failed to consider. That latter ground of appeal was dismissed. The Court held that if HMRC believed that the judge had misunderstood their position and failed to deal with a significant issues, they should have raised it upon receiving the decision. There may, the Court said, be some circumstances where a more inquisitorial approach is appropriate, but they did not apply in this case.
This article appears in the JHA April 2017 Tax Newsletter, which also features:
HM Revenue and Customs (“HMRC”) have issued Revenue and Customs Brief 1 (2017) setting out their position on claims for historical bad debt relief following the conclusion of part of the long-running litigation on this issue, in particular on the bad debt relief legislation that existed between 1978 and 1997.
Before 1 April 1989 the VAT bad debt relief scheme required the defaulting customer to be formally insolvent (“the Insolvency Condition”) and until 19 March 1997 there was also a condition that title in any goods must have passed to the customer (“the Property Condition”). The latter condition was more problematic than one might first think because it excluded relief in the case of any contract for the supply of goods which contains a retention of title (“Romalpa” clause).
The Court of Appeal held most recently in HM Revenue and Customs v GMAC (UK) Plc [2016] EWCA Civ 1015 that an EU Member State may decline to implement a system of relief for non-payment altogether, but if it does decide to implement a partial system of relief, its exercise of the power to derogate cannot escape scrutiny.
The Court had no hesitation in finding both the Insolvency Condition and the Property Condition to be disproportionate. However, this did not assist the taxpayer for supplies made prior to 1 April 1989 because the Court also held that such claims were time barred under section 39(5) Finance Act 1997: that provision did not render the exercise of the taxpayer’s EU law rights excessively difficult or virtually impossible because the company had more than adequate time to do so and was given adequate notice of the withdrawal of the scheme. By contrast, the Court rejected HMRC’s argument that the taxpayer, in asserting EU law rights, had to act within a reasonable period of time: the domestic legislation was to be read as being silent as to any time limit and therefore not imposing any, which was not incompatible with EU law.
Floyd LJ considered that this result might have been different if GMAC’s case had been that it was entitled to enforce its EU law rights without reference to any domestic mechanism.
HMRC will now pay claims relating to supplies of goods made between 1 April 1989 and 19 March 1997, but only subject to satisfactory evidence that the bad debts occurred and that the VAT had not previously been claimed. Because HMRC accepted, between 1989 and 1997, that title in goods would pass and therefore bad debt relief would apply where (1) goods had been sold on to a third party by the debtor or (2) the supplier chose to write to the customer and give up title in the goods to the customer, some businesses may previously have claimed relief. To ensure that they have not, HMRC will require claims to meet the requirements set out in conditions 1 to 5 in paragraph 2.2 of Notice 700/18. However, HMRC will consider alternative evidence as to amount and methodology, provided claimants can demonstrate (1) that they suffered bad debts on supplies of goods made under retention of title term (2) that they didn’t previously claim relief and (3) that the amount claimed is correct.
AG Opinion in Austria v Germany
This is the first case in which a Member State has brought, before the CJEU, a dispute between it and another Member State relating to the subject matter of the Treaties and submitted under a special agreement (Double Tax Convention) between the parties. The case is also important because it gives the Court the opportunity to define the limits of its jurisdiction under the Treaties and to consider whether it has the power to issue injunctions against Member States.
The dispute relates to the Double Tax Convention concluded between Austria and Germany and concerns the taxation of interest from registered certificates acquired by an Austrian Bank, a company established in Austria, from a German bank. The issue before the Court relates to the interpretation of the phrase “income from […] debt-claims with participation in [the debtor’s] profits” in Article 11(2) of the German-Austrian Convention. Austria argued that, as the Member State of residence of the beneficial owner of the interest paid, it alone is entitled to that income. Germany, on the other hand, contended that it also has the right to tax that income, as the Member State in which the interest originates because the interest must be classified as ‘income from rights or debt-claims with participation in profits’ within the meaning of the Convention. As a result of the conflict of interpretation between the two Member States, the interest was taxed twice.
The Advocate General found that Article 273 TFEU extends the Court’s jurisdiction to disputes which relate not only to EU law but also to international law, if the area of international law in question has a link to the subject matter of the Treaties – and in the present case such a link was present.
The Advocate General further found that the Court, except in case of interim measures, does not have the power to issue injunctions in the context of settling disputes such as the one in the present case and to compel Austria or Germany to act in a particular way. However, the parties must accept all of the consequences of the judgment and take the necessary measures to comply with it.
Finally, the Advocate General argued that the phrase in question must be interpreted autonomously in the context of the rules of interpretation particular to international treaties and independently of the national law of Austria and/or Germany. Consequently, he held, in favour of Austria, that the phrase must be restricted to situations in which the remuneration from debt-claims varies, at least partially, according to the amount of the debtor’s profits, which was not the case in the present proceedings. In other words, the phrase must be interpreted as meaning that it covers income that provides a creditor with a part/share of the debtor’s profits, and excludes income that varies only in the event of losses incurred by that debtor. The full opinion can be found here.
This article appears in the JHA April 2017 Tax Newsletter, which also features:
The Government has published its long awaited White Paper on the Great Repeal Bill (“The Bill”). This Bill is intended to be the cornerstone of the Government’s legislative programme designed to effect the UK’s exit from the EU.
The White Paper explains, in extremely broad terms, how the Government will legislate for the UK’s exit by introducing the Great Repeal Bill at the start of the next parliamentary session. The Bill will convert EU law (the ‘acquis’) as it applies in the UK on the day the UK leaves the EU into domestic law. In theory, same laws and rules will apply immediately before and after UK’s departure thereby preserving certainty. It will also give the Government powers to correct or remove the laws that would not function properly once Brexit occurs. This will be done, primarily, by secondary legislation.
References to the CJEU can still be made up until the moment the UK exits the EU. The White Paper does not explain what will happen to pending CJEU cases after the UK exits. After the UK’s exit from the EU, the CJEU will no longer have any jurisdiction over UK domestic matters. However, for as long as EU-derived law remains part of UK national law, the Bill will provide that any question on the meaning of EU-derived law will be determined in the UK courts by reference to the CJEU’s case law as it existed on the day of exit. Insofar as case law concerns an aspect of EU law that is not being converted into UK law, that element of the case law will not need to be applied by the UK courts. The Bill will provide that historic CJEU case law be given the same binding, or precedent, status in UK courts as decisions of the Supreme Court. Going forward under normal UK constitutional processes Parliament will be free to change the law, and therefore overturn case law, where it decides it is right to do so. As a consequence of those same constitutional processes where a conflict arises between EU-derived law and new primary legislation passed by Parliament after the UK exits the EU, the new legislation will take precedence over the EU-derived law.
On leaving the EU the UK will no longer be party to the Charter of Fundamental Rights. However the White Paper makes clear that the UK’s withdrawal from the EU will not change the UK’s participation in the European Convention on Human Rights and there are no plans to withdraw from the Convention.
The White Paper states that even though much of the content of the treaties will become irrelevant after Brexit, the treaties may assist in the interpretation of the EU laws the UK will preserve. Thus, after exit, UK courts will continue to be able to look to the treaty provisions in interpreting EU laws that are preserved. Furthermore, the rights in the EU treaties that can be relied on directly in court by an individual will be incorporated into UK law.
The Bill will limit the power of Government and ensure that the power will not be available where Government wishes to make a policy change which is not designed to deal with deficiencies in preserved EU-derived law. This is obviously a controversial aspect of the White paper and the Government will consider the current constraints placed on the delegated power in section 2 of the ECA and assess whether similar constraints may be suitable for the new power, for example preventing the power from being used to make retrospective provision or impose taxation.
A link to the White Paper can be found here.
A reoccurring issue in costs recoveries is the instruction of third party ‘experts’. These could be accountants or surveyors assisting in quantifying claims or foreign lawyers initially instructed by a foreign client but then instructed to assist in the litigation.
Some of their work may overlap with legal work, and the Court will apply tests as to whether the ‘experts’ costs can be recovered and on what basis.
Swiss Authorities: There are no frozen personal bank accounts or other personal assets in Switzerland in the name of Oleksandr Yanukovych.
On 9 December 2016 the Swiss Federal Council reported that they had decided to extend the freezing of all the assets in Switzerland of President Yanukovych, as well as of other Ukrainian individuals allegedly associated with him. Amongst other things, the report asserted that “assets amounting to approximately CHF 70 million are involved” (without saying precisely to whom those assets might belong).
The Swiss authorities have now confirmed in a letter of 1 March 2017 that there are no frozen personal bank accounts or other assets in Switzerland held in the name of President Yanukovuch’s son Oleksandr Yanukovych, apart from Mako Trading SA and its assets, which is controlled by Oleksandr Yanukovych. The other asset freezes imposed by Switzerland concern other persons listed in the Appendix to the Ordinance on the Freezing of Assets in Connection with Ukraine.
Oleksandr Yanukovych has always contended that he has no personal bank accounts or assets in Switzerland other than his company Mako Trading SA, which has an account in Switzerland that is transparent and audited, holding around CHF 1 million.
Enquiries to: Joseph Hage Aaronson LLP, Tel.: +44 (0)20 7851 8888
There does not appear to be any restrictions on EU law claims in today’s budget announcements. However the last two previous restrictions on EU claims were not announced with the budget but were only introduced very late at the final reporting stages of those bills, namely Part 8C CTA 2010 (the 45% super tax on interest payments by HMRC introduced in FA (2) 2015) and section 234 Finance Act 2013 (prohibition on interim payments against HMRC). There is one announcement that potentially infringes EU rights. A new 25% charge on pension transfers to qualifying recognised overseas pensions schemes has been introduced. This seems to involve a prima facie restriction on the EU right to free movement of capital. Although this does not apply where both the individual and the pension are located within the EEA, the right to free movement of capital applies outside the EEA as well. No similar charge would apply to transfers between UK registered pension funds.
Other announcements today include
Looking forward there will be:
The anticipated changes to partnership taxation – consulted on last year and where draft legislation was promised before this year – have not been announced today. Instead the government has said, again, that it will publish a response document (to last year’s consultation) and draft legislation.
This article appears in the JHA March 2017 Tax Newsletter, which also features:
The Supreme Court has granted HMRC permission to appeal on one issue, namely the amount of tax credit to which a taxpayer is entitled by way of reduction of the unlawful charge to corporation tax on foreign dividends under Schedule D Case V. The Court of Appeal held that credit should be given for the relevant foreign tax at the higher of the effective rate (i.e. the actual tax paid) or a credit at the foreign nominal rate. On all other issues (including those relating to ACT), the Court has reserved the decision on whether to grant permission for consideration at the hearing.
This article appears in the JHA March 2017 Tax Newsletter, which also features:
William Reeves v Revenue & Customs Commissioners
A non-UK resident taxpayer was unsuccessful in appealing against HMRC’s disallowance of his claim for holdover relief from capital gains tax under the Taxation of Chargeable Gains Act 1992.
The taxpayer had disposed of his interest in a UK-based business by transferring it by way of gift to a newly formed UK company of which he was the sole shareholder and director. HMRC disallowed the claim for holdover relief on the basis of s167 of the 1992 Act because the taxpayer’s wife was not UK-resident and, as an ‘associate’ of his, could be deemed to control the company. The parties agreed that on a literal interpretation, ‘control’ included both ‘real’ and ‘fictional’ control and that the Act therefore attributed control of the company to his non-resident wife. The issue was whether a purposive interpretation should be adopted so as to allow a claim for holdover relief.
The First-tier tribunal held that it was not possible to interpret “control” purposively so as to refer only to ‘real’ control and excluding ‘fictional’ control. Nor was it possible to be abundantly sure that there had been a statutory drafting error so as to enable the Tribunal to correct the literal meaning of the legislation. The taxpayer had also not suffered any difference in treatment and had been taxed in exactly the same way as a UK resident with a non-resident wife.
This article appears in the JHA March 2017 Tax Newsletter, which also features:
