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Charitable nursery

The taxpayer, a registered charity, ran a day nursery particularly for children from disadvantaged families. It received a grant, but this was not enough to cover all the costs, so it also charged fees to the parents. The fees were low, compared to commercially run nurseries, and were designed to cover the costs of the nursery after grants and donations. The taxpayer was not permitted to make distributions of profits under its memorandum of association.

The taxpayer carried out construction works on the nursery. Customs said that because the nursery was a business activity, the works were subject to VAT at the standard rate. The taxpayer's appeal to the tribunal succeeded, so Customs appealed.

In the High Court, the judge said the tribunal had interpreted the law correctly. The nursery activities of the taxpayer did not constitute a business within VAT Act 1994, Sch 8 Group 5 Item 2 Note (6), and the building works on the nursery should be zero rated.

Customs' appeal was dismissed.

(CCE v St Paul's Community Project Ltd, Chancery Division, 5 November 2004.)

VAT exclusive

A lease provided for the payment of a yearly basic rent and an additional rent to be calculated according to the tenant's turnover. Turnover was to mean gross amount of the total sales. The claimants asked whether VAT should be paid as part of the turnover rent, but continued to pay turnover rent inclusive of VAT. They eventually brought proceedings claiming that VAT should be not be included within the turnover calculation.

In the High Court, Etherton J said that the exclusion of VAT from the calculation of turnover rent was consistent with the commercial purpose of both parties, and that it gave a true and fair view of the words in the lease.

The claim was allowed.

(Debenhams Retail plc and another v Sun Alliance and London Assurance Co Ltd, Chancery Division, 9 November 2004.)

Proportionality

A repayment trader dealt in a mixture of high value readily movable zero-rated goods. Customs made a thorough investigation of the claimant's claims for repayment of input tax to ensure they were genuine. Apart from one claim, Customs repaid all the claims. The claimant said that in verifying its claims:

In the High Court, Lightman J said that the EC law principle of proportionality required the existence of a reasonable relationship of proportionality between Customs' legitimate aim of ensuring the correct tax was paid and checking claims were genuine before accepting them. Given the checks within the domestic legislation, current procedures did not fall short of the standard required by the principle of proportionality.

The judge then said that Customs had no duty to repay input tax until the claim had been agreed. The taxpayer had to satisfy Customs that he was entitled to repayment, and fiscal neutrality required that repayment should not be made to a taxable person who had not shown such entitlement. Just making a claim was not sufficient to show entitlement.

Finally, the judge said that Customs were not obliged to pay interest on a sum from the date it was claimed.

The taxpayer's application was dismissed.

(R (on the application of UK Tradecorp Ltd) v CCE, Administrative Court, 10 November 2004.)

Loss claim refused

The appellant appealed to the Special Commissioners against the refusal of a TA 1988, s 574 loss claim in respect of shares in a trading company.

On 23 June, the appellant acquired two shares, i.e. the entire share issue, in Gemforce Ltd, and was appointed sole director. The nominal share capital of the company was increased from £100 to £250,000 in ordinary £1 shares. On 27 June, Gemforce entered into an agreement to buy all the 10,000 issued shares in In-Flight Supply Services (International) Ltd from Ross Group plc for £225,000. On 8 November, £225,000 was transferred into Gemforce's bank account. On the same day, £225,000 was transferred from an account in the name of Gemforce to Ross Group, and 224,998 shares in Gemforce were allotted to the appellant for a consideration of £224,998. On 1 December, In-Flight Supply Services (International) Ltd went into liquidation, and the next day, its goodwill and stock were sold to a newly incorporated company, In Flight Supply Services (International) Ltd, of which the appellant was a director.

The appellant showed in his 1994-95 tax return, the disposal of 224,998 shares in Gemforce for nil on 1 December 1994, following their acquisition for £224,998 on 8 November. He did not date his return with his signature; the only date on the return was 1 September 1995 shown on the first page of the schedules.

On 27 September 1996, the appellant claimed under TA 1988, s 574 to have the loss incurred in respect of the shares in Gemforce set off against his total income for 1994-95. The Revenue refused, on the basis that the appellant still owned the Gemforce shares at 5 April 1995, and there had been no deemed disposal of the shares under TCGA 1992, s 24(2), since no claim had been made in respect thereof.

The taxpayer appealed to the Special Commissioner.

The Special Commissioner said that s 574 required the individual to incur an allowable loss for capital gains tax purposes. There had to be a disposal or deemed disposal to establish such a loss. As the appellant did not incur an actual loss during 1994-95, he had to show a deemed disposal, and the only way of doing so, in the circumstances, was by way of a TCGA 1992, s 24(2) claim. Thus the Commissioner rejected the appellant's argument that a s 24(2) claim was not required as a precondition of a s 574 claim.

Furthermore, contrary to the appellant's assertion that a s 24(2) claim had been made in the return, the Commissioner said that nothing in the return amounted to such a claim. Therefore, there was no allowable loss for the purposes of the s 574 claim.

The taxpayer's appeal therefore failed.

(Marks v McNally (SpC 428).)

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