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31 January 2001
Tax cases
Fishy business
Fishy business
Tax cases
Fishy business
Anyone contemplating opening a fish and chip shop should first reflect on the fact that this appears to be the most contentious business one can engage in as far as VAT is concerned. Not many batches of VAT tribunal decisions arrive without there being one included which relates to an investigation into a fish and chip business. The Georgiou case concerning such a business was the longest running VAT appeal case in the United Kingdom, extending over 49 working days in 1993. The appellants failed at the VAT tribunal, the High Court and the Court of Appeal with leave to appeal to the House of Lords being refused; as a result they have now been before the European Court of Human Rights.
The applicants accepted that there had been under-declarations of the shop's takings but did not accept the methodology of Customs and Excise in order to establish the additional VAT due. Having failed in the United Kingdom courts, they now applied to the European Court of Human Rights contending that:
(i) legal aid should have been available to instruct leading counsel in the Court of Appeal;
(ii) they had been denied access to relevant documents;
(iii) there was inordinate delay (of nine months) in the release of the tribunal's decision and further inordinate delay in the court proceedings extending over seven years. The applicants also complained of defects in the procedures at Customs in relation to the raising of assessments on them.
The European Court of Human Rights confirmed that the penalties on the applicants were within the category of criminal charges for the purposes of the 1950 Convention on Human Rights, since they contained elements of deterrence and punishment. Nevertheless the Court did not see that leading counsel was, as a result, a necessity for their Court of Appeal hearing, nor that any unfairness had arisen in the process of discovery of documents before the tribunal hearing. As regards the length of the proceedings, this was partly attributable to the stance taken by the applicants themselves and in addition both sides accepted that the case was a complex one.
Accordingly the applicants' complaints were not upheld. More generally the Court reiterated that the legislature must be allowed a wide margin of appreciation and the Court would respect the legislature's assessment in such matters unless it was devoid of reasonable foundation.
(Georgiou and another v United Kingdom, European Court of Human Rights, 16 May 2000.)
The wider view
In November 1999, Monarch Assurance plc submitted to the Revenue a draft of an unusual form of with profits ten year term life assurance policy certification as a qualifying policy under section 267 of, and Schedule 15 to, the Taxes Act 1988. The policy contained an option for a new policy after the end of the ten year period with a right to carry forward to the new policy the reversionary bonuses from the original policy. As the Revenue failed to respond to the draft, the company applied for judicial review.
In June 2000, the Revenue responded and said that it could see no actuarial logic or economic purpose to the policy and had to conclude that it formed part of a larger financial arrangement. It therefore refused to accept the policy as a qualifying one.
There were two issues before the court:
* was the new policy a qualifying one, or did it secure other benefits beyond those permitted under paragraph 1(1)(b) of Schedule 15 to the Taxes Act 1988;
* did the Revenue have discretion to refuse to certify a policy even if it passed the statutory test?
Mr Justice Dyson said first that the policy did not fall foul of paragraph 1(1)(b) of Schedule 15 by securing other benefits, as the right to receive the reversionary bonus was a right to participate in the profits of the initial policy. Under the new policy, the reversionary bonus would simply not be payable until the sum assured was payable.
Secondly, he said that the Revenue's power to certify policies was a discretionary one, even if this was not expressly stated in statute. Parliament's intention in drafting the language of the legislation was to give the Revenue discretionary powers, as a policy could satisfy the conditions even if it were part of a wider avoidance scheme.
In the instant case, the Revenue was not happy that it had been given the full facts surrounding the new policy and it was entitled to reach the decision which it had.
Monarch's application was dismissed.
(R (on the application of Monarch Assurance plc) v Commissioners of Inland Revenue, Administrative Court, 13 December 2000.)
Logical conclusion
A partnership, CPA, was established in Jersey on 1 April 1969. CPA was managed and controlled for income tax purposes in Jersey, and no business was done through any permanent establishment in the United Kingdom. The appellant had been a partner in CPA since 1976. He claimed tax relief in respect of his share of the profits for the year 1987-88 under section 497(1), Taxes Act 1970 and for the years 1988-99 under section 788(3), Taxes Act 1988 and paragraph 3 of the Arrangement with the States of Jersey scheduled to the Double Taxation Relief (Taxes on Income) (Jersey) Order. The Special Commissioners upheld the Revenue's refusal of the claim.
Back in 1989, the Court of Appeal upheld the High Court's decision that the taxpayer was entitled to exemption from income tax in respect of his share of the profits. Following that success, the Revenue changed the law to block the result thereafter. The point at issue in the instant appeal was whether the exemption was removed for 1987-88 by that new legislation which was section 62, Finance (No 2) Act 1987, and whether section 112(4), Taxes Act 1988 had the same effect for all the subsequent years.
Clearly the intention of the legislation in enacting section 62 was to remove the exemption. However, it was accepted that there was a conflict between the provisions of section 497, Taxes Act 1970 and section 788(3), Taxes Act 1988 which had effect 'notwithstanding anything in any enactment', and the provisions in section 62(1), Finance (No 2) Act 1987 and section 112(4), Taxes Act 1988 which limited the effect of all such arrangements. The question was how to resolve that conflict.
Mr Justice Lightman said that the provisions of section 62, Finance (No 2) Act 1987 and section 112(4), Taxes Act 1988 had to be given precedence for three reasons. Firstly, the taxpayer's interpretation would deprive those two sections of all effect. It was clearly preferable to find a solution that gave effect to all the sections. This could be done by treating the general rule of the supremacy of the provisions of the arrangements laid down by sections 497(1) and 788 as qualified by the special rule in sections 62 and 112(4) and (5) in the case of a United Kingdom resident partner in a Jersey partnership.
Secondly, this solution gave a purposive construction to the conflict. The aim of section 62 was to remove the exemption given to the taxpayer by the Jersey Arrangement (this was incorporated in the Taxes Act 1970), and to make the legislation effective section 62 had to prevail.
Finally, the legislation had been deliberately changed to remove the tax exemption. There was no reason to presume that it had not been intended to override the Jersey Arrangements or that it had not been intended to impose a tax liability on the taxpayer.
The appeal was dismissed.
(Padmore v Commissioners of Inland Revenue (No 2), Chancery Division, 22 January 2001.)
Fishy business
Anyone contemplating opening a fish and chip shop should first reflect on the fact that this appears to be the most contentious business one can engage in as far as VAT is concerned. Not many batches of VAT tribunal decisions arrive without there being one included which relates to an investigation into a fish and chip business. The Georgiou case concerning such a business was the longest running VAT appeal case in the United Kingdom, extending over 49 working days in 1993. The appellants failed at the VAT tribunal, the High Court and the Court of Appeal with leave to appeal to the House of Lords being refused; as a result they have now been before the European Court of Human Rights.
The applicants accepted that there had been under-declarations of the shop's takings but did not accept the methodology of Customs and Excise in order to establish the additional VAT due. Having failed in the United Kingdom courts, they now applied to the European Court of Human Rights contending that:
(i) legal aid should have been available to instruct leading counsel in the Court of Appeal;
(ii) they had been denied access to relevant documents;
(iii) there was inordinate delay (of nine months) in the release of the tribunal's decision and further inordinate delay in the court proceedings extending over seven years. The applicants also complained of defects in the procedures at Customs in relation to the raising of assessments on them.
The European Court of Human Rights confirmed that the penalties on the applicants were within the category of criminal charges for the purposes of the 1950 Convention on Human Rights, since they contained elements of deterrence and punishment. Nevertheless the Court did not see that leading counsel was, as a result, a necessity for their Court of Appeal hearing, nor that any unfairness had arisen in the process of discovery of documents before the tribunal hearing. As regards the length of the proceedings, this was partly attributable to the stance taken by the applicants themselves and in addition both sides accepted that the case was a complex one.
Accordingly the applicants' complaints were not upheld. More generally the Court reiterated that the legislature must be allowed a wide margin of appreciation and the Court would respect the legislature's assessment in such matters unless it was devoid of reasonable foundation.
(Georgiou and another v United Kingdom, European Court of Human Rights, 16 May 2000.)
The wider view
In November 1999, Monarch Assurance plc submitted to the Revenue a draft of an unusual form of with profits ten year term life assurance policy certification as a qualifying policy under section 267 of, and Schedule 15 to, the Taxes Act 1988. The policy contained an option for a new policy after the end of the ten year period with a right to carry forward to the new policy the reversionary bonuses from the original policy. As the Revenue failed to respond to the draft, the company applied for judicial review.
In June 2000, the Revenue responded and said that it could see no actuarial logic or economic purpose to the policy and had to conclude that it formed part of a larger financial arrangement. It therefore refused to accept the policy as a qualifying one.
There were two issues before the court:
* was the new policy a qualifying one, or did it secure other benefits beyond those permitted under paragraph 1(1)(b) of Schedule 15 to the Taxes Act 1988;
* did the Revenue have discretion to refuse to certify a policy even if it passed the statutory test?
Mr Justice Dyson said first that the policy did not fall foul of paragraph 1(1)(b) of Schedule 15 by securing other benefits, as the right to receive the reversionary bonus was a right to participate in the profits of the initial policy. Under the new policy, the reversionary bonus would simply not be payable until the sum assured was payable.
Secondly, he said that the Revenue's power to certify policies was a discretionary one, even if this was not expressly stated in statute. Parliament's intention in drafting the language of the legislation was to give the Revenue discretionary powers, as a policy could satisfy the conditions even if it were part of a wider avoidance scheme.
In the instant case, the Revenue was not happy that it had been given the full facts surrounding the new policy and it was entitled to reach the decision which it had.
Monarch's application was dismissed.
(R (on the application of Monarch Assurance plc) v Commissioners of Inland Revenue, Administrative Court, 13 December 2000.)
Logical conclusion
A partnership, CPA, was established in Jersey on 1 April 1969. CPA was managed and controlled for income tax purposes in Jersey, and no business was done through any permanent establishment in the United Kingdom. The appellant had been a partner in CPA since 1976. He claimed tax relief in respect of his share of the profits for the year 1987-88 under section 497(1), Taxes Act 1970 and for the years 1988-99 under section 788(3), Taxes Act 1988 and paragraph 3 of the Arrangement with the States of Jersey scheduled to the Double Taxation Relief (Taxes on Income) (Jersey) Order. The Special Commissioners upheld the Revenue's refusal of the claim.
Back in 1989, the Court of Appeal upheld the High Court's decision that the taxpayer was entitled to exemption from income tax in respect of his share of the profits. Following that success, the Revenue changed the law to block the result thereafter. The point at issue in the instant appeal was whether the exemption was removed for 1987-88 by that new legislation which was section 62, Finance (No 2) Act 1987, and whether section 112(4), Taxes Act 1988 had the same effect for all the subsequent years.
Clearly the intention of the legislation in enacting section 62 was to remove the exemption. However, it was accepted that there was a conflict between the provisions of section 497, Taxes Act 1970 and section 788(3), Taxes Act 1988 which had effect 'notwithstanding anything in any enactment', and the provisions in section 62(1), Finance (No 2) Act 1987 and section 112(4), Taxes Act 1988 which limited the effect of all such arrangements. The question was how to resolve that conflict.
Mr Justice Lightman said that the provisions of section 62, Finance (No 2) Act 1987 and section 112(4), Taxes Act 1988 had to be given precedence for three reasons. Firstly, the taxpayer's interpretation would deprive those two sections of all effect. It was clearly preferable to find a solution that gave effect to all the sections. This could be done by treating the general rule of the supremacy of the provisions of the arrangements laid down by sections 497(1) and 788 as qualified by the special rule in sections 62 and 112(4) and (5) in the case of a United Kingdom resident partner in a Jersey partnership.
Secondly, this solution gave a purposive construction to the conflict. The aim of section 62 was to remove the exemption given to the taxpayer by the Jersey Arrangement (this was incorporated in the Taxes Act 1970), and to make the legislation effective section 62 had to prevail.
Finally, the legislation had been deliberately changed to remove the tax exemption. There was no reason to presume that it had not been intended to override the Jersey Arrangements or that it had not been intended to impose a tax liability on the taxpayer.
The appeal was dismissed.
(Padmore v Commissioners of Inland Revenue (No 2), Chancery Division, 22 January 2001.)
