Shop Direct Group received £124,963,600 of overpaid VAT after the trades which had generated the overpayments had permanently ceased. The Supreme Court held that section 103 of the Income and Corporation Taxes Act 1988 charges such post-cessation receipts on the recipient, and is not limited to the company which originally carried on the trade. On the facts found, section 106 did not move or remove that charge.
The repayment in dispute
Companies in the Littlewoods group paid value added tax for many years on an incorrect understanding of the law. HMRC later repaid the tax with statutory interest. Earlier in the proceedings the dispute covered several companies and both repayments and interest, together more than £630 million. This appeal concerned only whether £124,963,600 of overpaid VAT, called VRP2 and paid in the tax year 2007–2008, was liable to corporation tax in the hands of Shop Direct Group (SDG). The First-tier Tribunal, the Upper Tribunal and the Court of Appeal had held that it was. Permission to appeal was limited to VRP2, not the related interest.
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The charge on post-cessation receipts
Before the Finance Act 1960, income of a trade could escape tax if it was received after the trade had permanently stopped. The courts still treated the money as the fruit or aftermath of the trade, but it was not taxed under the ordinary trading Cases of Schedule D because the trade was not being carried on in the year of receipt. Sections 103 to 110 of the Income and Corporation Taxes Act 1988 closed that gap for corporation tax. Section 103 charges tax under Case VI of Schedule D, the Case for annual profits or gains not falling under any other Case, on sums arising from the trade before a permanent discontinuance and received afterwards, where their value has not already been brought into account and they are not otherwise chargeable. These companies had computed profits by reference to earnings, so that part of the section applied.
Section 106 covers some transfers of the right to those sums. On a transfer for value, subsection (1) charges the transferor on the consideration, or on market value if the transfer is not at arm’s length. Subsection (2) applies where a change in the persons carrying on a trade is treated as a discontinuance and the right passes to the company which carries the trade on. Section 103 is then disapplied, and sums received by that company by virtue of the transfer are brought into its trading profits when received. That rule closed a gap in which a new partnership had collected a customer’s debt incurred by the old partnership and escaped tax because the collection was held not to be part of the new partnership’s trade.
How VRP2 reached SDG
The VAT had been overpaid because it was wrongly calculated on sales of goods to agents of the supplier with a discount for commission. Supplies between 1978 and 1996 by SDG, then named John Noble Ltd, Reality Group Ltd, Kay & Co Ltd, Abound Ltd and GUS plc made up VRP2. The representative member of the VAT group had accounted for the tax. By the time of repayment, every company that had made the supplies had permanently discontinued its trade.
Trades passed between companies in the group. The tribunal’s findings about those transfers and the arrangements for repayment determined whether section 106 applied.
Why the charge was not confined to the original trader
SDG argued that, at most, tax could be charged on about £200,000, the part relating to supplies it had itself made in 1986 and 1987. It said that section 103 charges only the original trader; that an intra-group transfer of the money, without an assignment of rights, fell outside the section; and that a transfer of the right was either outside section 103 or protected by section 106.
Lord Hodge, with whom Lord Neuberger, Lord Reed, Lord Carnwath and Lord Hughes agreed, held that section 103 does not limit the charge to the former trader. It identifies the source of the sums and requires only that they are received after discontinuance. Its purpose was to tax the fruit of the discontinued trade not only in the hands of the former trader, personal representatives and heirs, but also in the hands of an assignee or anyone else entitled to receive and keep the sums. The charge falls on the recipient even though the trade is no longer a continuing source. Neighbouring provisions support that reading. Section 105 distinguishes sums received by any person, later any company, from losses, expenses and capital allowances of the person who carried on the trade. As first enacted, section 108 confined a carry-back election to the former trader or that person’s personal representatives.
The argument that an intra-group transfer was the real source of the receipt was rejected. Cases about whether a payment to an employee is remuneration from the employment ask a different statutory question and had no bearing. Under section 103 the question is whether the sum arose from the discontinued trade before discontinuance. Arrangements about which group company should receive the repayment did not change that original source.
The limits of section 106
Section 106(1) applies only to a transfer for value. A transfer for no consideration is outside it. That is consistent with section 103 taxing the person who later receives the sums: a seller of the right is taxed on the value obtained, while a recipient for nothing is taxed when the money comes in. Section 106(2) applies only if the successor receives the sums while it is still trading. Lord Hodge read the words which bring those sums into trading profits as the trigger for disapplying section 103. Parliament cannot have intended a company to escape tax by ceasing to trade, or by transferring its trade and keeping the right to the receipts. If the successor receives the sums while trading, they are taxed as trading receipts. If it does not receive them, or receives them after it has stopped trading, section 103 charges the actual recipient.
The findings applied
The Court refused to allow a late argument that section 106(1) charged some company other than SDG. SDG had not run that argument before the First-tier Tribunal, had led no evidence of the intra-group transfers, and bore the burden of overturning the assessment. Its principal case was that the money, or the rights, reached it for no consideration. Without a sale, section 106(1) would not charge a transferor.
On the findings, there was no relevant transfer for value, so section 106(1) did not apply. Section 106(2) did not apply either: although SDG’s trade had passed to Shop Direct Home Shopping Ltd, none of the repayments was paid to that company. It was unnecessary to decide SDG’s challenge to the finding that the 2005 transfer did not include the right to the repayments. SDG received sums arising from the carrying on of the trades before they were discontinued, and those sums were not otherwise chargeable. They were therefore chargeable to corporation tax under section 103.
Verdict: The Court unanimously dismissed Shop Direct’s appeal. The second VAT repayment was chargeable to corporation tax in the hands of the company that received it. The appeal did not determine the tax treatment of the interest.
Source: Shop Direct Group v Commissioners for Her Majesty’s Revenue and Customs [2016] UKSC 7
