Tax Cases - Share issue is exempt supply

Tax Cases

Share issue is exempt supply
In May 1991, Mirror Group Newspapers carried out a share issue, under which the public was invited to subscribe for shares in the Mirror, in order to raise funds to expand the business. European Union residents and non-residents could purchase these shares. Mirror incurred some £1.5 million VAT in respect of various professional fees related to the issue, and claimed it back as input tax on its overheads.
Customs said that only the VAT relating to the issue of shares to non-European Union residents could be recovered, as the share issue was an exempt supply of services. The tribunal agreed.
In the High Court it was agreed that for a share issue to constitute a supply of services within Article 6 of Council Directive 77/388, it had to have six characteristics:

* it had to have constituted a transaction;
* something had to be done by the person said to have made the supply;
* what was done did not fall within the definition of a supply of goods;
* what was done had to be capable of being used by the recipient;
* the benefit given to an identified recipient had to be capable of being regarded as a cost component of the activity of another person in the commercial chain;
* what was done had to be done for a consideration.

The High Court did not agree with Mirror's contention that a further characteristic was required, i.e., there had to be some transfer of the resources of the person making the supply. The judge ruled that the issue of shares to a subscriber was a supply of services for a consideration capable of being expressed in money terms.
In the Court of Appeal, the Lord Justices said that the issue by a taxable person in the United Kingdom of its own shares for the purposes of expanding the business was a supply of services for the purposes of the VAT Act 1994. Mirror argued that in the context of a share issue, the consideration for the supply was part of the supplier's turnover and compared the issue of shares by a company to raising money by taking out a loan.
The court said, however, that turnover in the context of the VAT legislation had a wide meaning and was effectively a convenient label for what was described in Article 11A(1)(a) of the Sixth Directive as 'everything which constitutes the consideration which has been or was to be obtained by the supplier from the purchaser, the customer or a third party for supplies of goods or services'. The correct approach was to ask whether, in the light of the definitions in the VAT Act and the Sixth Directive, the 'something done' should be treated as a supply of goods or services. If it was, then the consideration obtained by the supplier was part of turnover. In the instant case, the High Court judge was right to say that the issue by a taxable person of its own shares was an exempt supply. Mirror would therefore not be able to recover the input tax.
The appeal was dismissed.
(Trinity Mirror plc (formerly Mirror Group Newspapers Ltd) v Commissioners of Customs and Excise, Court of Appeal, 25 January 2001.)

An unfortunate dissolution
An accountancy partnership, which was registered for VAT, was sold as a going concern. Under the conditions of sale the two former partners provided consultancy services individually at a fee for a period of two years.
Separate consultancy agreements were entered into by the two partners and fees were rendered accordingly in November 1997 and November 1998. As neither of the former partners was registered individually for VAT, no VAT was charged on the invoices. However, the new owners failed to pay the fees, and the former partners issued legal proceedings in their joint names.
The two former partners formed their own partnership on 1 January 1998 and registered for VAT purposes. Legal costs for the recovery of the consultancy fees were received and paid, with the VAT claimed as input tax by the new partnership.
Customs and Excise issued an assessment for VAT on the two individuals, which was unsuccessfully appealed to the VAT tribunal. In the High Court, Mr Justice Jacob observed that there was no dispute in law between the parties. If the fees had been due to the individuals as partners, they would have been entitled to deduct the VAT on the legal costs. However, as individuals not registered for VAT, the VAT on the legal costs was not recoverable. It was a matter of fact that the appellants were suing on individual contracts. Accordingly the tribunal decision was upheld.
(Sherman and another v Commissioners of Customs and Excise, Chancery Division, 18 January 2001.)

Golf club wins a round
Under Swedish VAT law, transactions relating to immovable property are exempt. Until January 1997 that exemption extended to the supply of premises or facilities 'for the purpose of the practice of sport or physical education'.
The claimant company, which operated a golf course, alleged that the compulsory exemption until January 1997, and consequent inability to deduct input VAT, was contrary to the provisions of the Sixth VAT Council Directive 77/388/EEC.
Accordingly it claimed a sum representing the amount of input tax not deducted, with interest. Preliminary reference was made to the European Court to obtain a ruling as to whether Article 13 of the Sixth Directive precluded a general exemption for the supply of sports premises and facilities, and accordingly whether the relevant provisions of the directive had direct effect. Finally the court was asked to determine whether there was a sufficiently serious breach of Community law to render the Swedish State liable to damages.
The court observed that the Article 13(A)(1)(m) exemption was specifically limited to non-profit making organisations, and the pre-1997 exemption was therefore inconsistent with the Sixth Directive. Whether the operation of a golf club could constitute the 'letting of immovable property' within Article 13(B)(b) was for the national court to decide, but the court set out established principles that needed to be taken into account, including the fact that the Article 13 exemptions were to be interpreted strictly.
Articles 17, 2, 6(1) and 13(B)(b) taken together were sufficiently clear, precise and unconditional to enable individuals to rely on them as against a Member State before a national court.
As the provisions had direct effect, the claimant could claim a sum by simple reliance on them rather than an action for damages. However, the breach of regulations had to be sufficiently serious, and it was up to the national court to decide whether the conditions for liability were met. In this respect it had to take into account the circumstances that the wording of Article 13(A)(1)(m) was clear and not open to reasonable doubt. Other considerations were that the general sports exemption in the Swedish law had no basis in the directive: and, that in view of the amendment of the law in January 1997, the Swedish legislature must have become aware of that fact.
(Stockholm Lindopark AB v Svenska Staten (Case C – 150/99), European Court of Justice, 18 January 2001.)