In 1999, a partnership registered for VAT began trading in mobile telephones. It purchased telephones from company A and sold them to company B. The partnership claimed that it incurred input tax on the purchase of the telephones, but that no output tax was due on their sale to company B, because such sales were zero rated exports. Thus returns were made to Customs in which the partnership claimed to recover the excess of its input tax over its output tax for the relevant period.
In 1999, a partnership registered for VAT began trading in mobile telephones. It purchased telephones from company A and sold them to company B. The partnership claimed that it incurred input tax on the purchase of the telephones, but that no output tax was due on their sale to company B, because such sales were zero rated exports. Thus returns were made to Customs in which the partnership claimed to recover the excess of its input tax over its output tax for the relevant period.
Customs said that the partnership was involved in a carousel fraud, and refused the claim.
Subsequently, a VAT tribunal gave Customs one month in which to show cause as to why fraud was alleged, and to let it know if a criminal investigation was under way. At the second tribunal hearing, Customs said that it was not carrying out a criminal investigation, so the tribunal directed that the issue of fraud be removed from the statement of case. However, it gave Customs another opportunity to make an alternative case which was not based on claiming a fraud was being perpetuated. Customs failed to do this, although they applied for the specific paragraphs be permitted to stand.
The tribunal allowed the taxpayer's appeal on the grounds that Customs had not produced grounds against the taxpayer, that allegations of fraud were now precluded, and that the delay was causing financial hardship.
Customs appealed to the High Court on the ground that the supplies to the partnership were not taxable supplies made by a taxable person. The original invoices were not issued in the name of company A, despite them having company A's VAT registration number. Customs said that if they had failed to comply with the tribunal's directions, it was a first breach, and it should not bar them from defending the appeal.
Mr Justice Lightman said that the tribunal had exercised its discretion reasonably and in a judicial way. It could only proceed on the basis of the case presented by Customs, and could not be expected to conjure up new contentions. Customs had had plenty of time in which to plead a maintainable case, yet persisted in pleading one which was untenable. The judge said that it was not open to another court to reach a different conclusion simply because that would apparently promote better justice. Dismissing the appeal, he said that Customs had only themselves to blame if they were compelled to make a payment to the partnership to which it was not entitled.
(Commissioners of Customs and Excise v A & D Goddard (a firm), Chancery Division, 20 March 2001.)
The few justify the many
Deanby Investment Co was incorporated in Northern Ireland. In 1997, it made a loan of £30,000 to its chairman. The shares in the company were held as follows: 37 per cent by C Ltd, 37 per cent by B Ltd, and 26 per cent between the chairman's wife and children. B Ltd and C Ltd were close companies run by the chairman's family. The three companies had made loans since 1978 at a commercial rate of interest to the chairman, although he had repaid these by 1994. The 1997 loan was to enable him to buy shares in S Ltd, a company in which Deanby Investment Co had a shareholding.
The Inspector issued a section 419(1), Taxes Act 1988 assessment, so the company appealed.
The Special Commissioner found that the taxpayer company was an investment company carrying on a business which included lending money, and that the 1997 loan had been made in the ordinary course of that business. Thus the loan could be excepted under section 419(1) as a loan by a close company to an associate or participator made in the ordinary course of the business. The Revenue appealed.
In the Court of Appeal, Lord Chief Justice Carswell said that the exception in section 419(1) could not be construed as widely as the Special Commissioner had suggested. The phrase 'a business carried on by it which includes the lending of money' implied a certain regularity of such transactions. Loans needed to be made to a variety of customers, rather than just the participator. This was the aim of the legislation.
The Special Commissioner had been justified in saying that the loans were made as investments, but he was wrong not to consider what more than making loans by way of investment was required to bring the circumstances within the exception in section 419(1). It was not enough just to make the loan.
The judge said that the transaction did not come within the exception. While the legislation was not there specifically to catch such transactions, it had to be widely drawn in order to catch those at whom it was aimed. Despite the taxpayer not having sought any tax advantage from the transaction, it was not within the exception in section 419(1).
The Revenue's appeal was allowed.
(Brennan v Deanby Investment Co Ltd, Court of Appeal (Northern Ireland), 12 January 2001.)
