Tax cases

Melville scheme succeeds

As part of a tax planning arrangement, funds were transferred into a discretionary trust but in order to minimise the transfer of value for inheritance tax purposes the settlor retained a power to recover the settled property during a certain period of time. The question before the Court of Appeal was whether under the Inheritance Tax Act 1984 a general power of appointment exercisable over property comprised in a settlement was 'property' forming part of the holder's estate. The Revenue said that it was not so that the device did not reduce the chargeable transfer on the making of the settlement. The Revenue issued to the settlor and the trustees notices of determination to that effect under section 221, Inheritance Tax Act 1984. The taxpayers' appeal was allowed in the High Court, so the Revenue appealed.

The Appeal Court judges said that property was not required to have a meaning other than the statutory one. The holder of a general power of appointment clearly had a valuable right which had to be taken into account in the value of the holder's estate under section 5(1), Inheritance Tax Act 1984, unless excluded elsewhere in the Act. Nothing in the settled property provisions caused or required such a power to be excluded property or prevented it from being property, the value of which was to be included in the settlor's estate.

The Revenue's appeal was dismissed and thus the scheme succeeded.

(Melville and others v Commissioners of Inland Revenue, Court of Appeal, 31 July 2001.)

Partition, not reconstruction

A company, F&M Ltd, was partitioned in April 1980 the relevant clearance under section 87, Capital Gains Act 1979 having been obtained. The transferee companies gave the written undertakings requested by the Revenue, the effect of which was that the companies agreed that the capital gains tax base values of the assets transferred to them would not be the market values at the time of the restructuring, but rather the original base values of the transferor company.

M and his wife owned ordinary and preference shares in CL Ltd, one of the new companies, and they disposed of all their ordinary shares between 1981 and 1987. The Revenue assessed tax on the basis that the acquisition cost of the shares was that of the shares in F&M Ltd, since the CL Ltd shares had been acquired under an arrangement within section 86, Capital Gains Act 1979. M died in 1994, so his executors appealed against the assessment arguing that section 86 did not apply because there was no reconstruction. F&M had rather been partitioned between the two new companies, so M's shares in CL Ltd had been acquired in consideration of the disposal of his F&M shares. The acquisition value of the CL shares was therefore the market value of the F&M shares at the date their disposal.

Mr Justice Park said that the issue for the court to decide was whether section 86, which the Revenue applied to the 1980 transaction, applied as a matter of law, or concessionary practice. This question was then reduced to whether the events amounted to a scheme of reconstruction in law.

The shareholders had, before the transactions, carried on all the businesses of F&M Ltd, whereas after the transactions, the shares were split, so that the shareholders held shares in only one of the new companies. They did not own shares in all the new companies. The essence of the scheme was that it was a partition, not a reconstruction, and as a matter of law section 86 did not apply to it. The shares of M and his wife therefore had a capital gains tax value equal to their market value in 1980.

The appeal was allowed.

(Fallon and another v Fellows, Chancery Division, 31 July 2001.)

Supplies of bonus in kind

A group of companies in Germany in business as book and record clubs gave bonuses in kind, such as books, which they bought in from third-party suppliers, to existing members in return for the introduction of new members. In assessing the companies to VAT on the supplies of the bonuses, the tax authority included the purchase price of the goods, and the costs of delivering them to the introducing members, which were borne by the companies. The Bundesfinanzhof referred to the European Court for a preliminary ruling on the question of whether those costs should be included in the taxable amount.

Article 11(A) of Sixth VAT Council Directive 77/388/EEC provides:

'(1) The taxable amount shall be:

'(a) in respect of supplies of goods and services ... everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies ...

'(2) The taxable amount shall include: ...

'(b) incidental expenses such as ... transport ... costs charged by the supplier to the purchaser or customer ...'

Article 11(A)(2)(b) of the directive did not apply as the companies did not charge the delivery costs to the 'customers', i.e., the introducing members. The question therefore was whether (1)(a) applied. The consideration for a supply of goods could consist of a supply of services if there was a direct link between them, and the value of the services could be expressed in monetary terms, Empire Stores Ltd v Commissioners of Customs and Excise (Case C-33/93) [1994] STC 623 referred. Those conditions were satisfied as to the supply of the bonuses in kind, as there was a direct link with the introduction of new customers, and the introduction was remunerated with supplies of goods with a monetary value. A supply was regarded as incidental to a principal supply if it constituted for the customer a means of better enjoying the principal service, rather than an end in itself, Card Protection Plan Ltd v Commissioners of Customs and Excise (Case C-349/96) [1999] STC 270 referred. The delivery of the bonuses was a service incidental to the principal supply of the bonuses, so that together they formed a single transaction remunerated by the introduction of new customers. The value of a transaction was what the recipient of the services attributed to it, and corresponded to the amount he was prepared to pay for it. In the instant case, that was the total of the expenses borne by the companies in order to obtain the supply, including the costs of delivery.

The Court therefore ruled that the taxable amount for the supply of a bonus in kind given as consideration for the introduction of a new customer included the purchase price, and the costs of delivery when they were paid by the supplier of the bonus.

(Bertelsmann AG v Finanzamt Wiedenbrück (Case C-380/99), European Court of Justice, 3 July 2001.)

Issue: 3820 / Categories: