“(1) The Schedule referred to as Schedule D is as follows:— SCHEDULE D Tax under this Schedule shall be charged in respect of— (a) the annual profits or gains arising or accruing—… (ii) to any person residing in the United Kingdom from any trade, profession or vocation, whether carried on in the United Kingdom or elsewhere, … (b) all interest of money, annuities and other annual profits or gains not charged under Schedule A, C or E, and not specially exempted from tax. (2) Tax under Schedule D shall be charged under the Cases set out in subsection (3) below, and subject to and in accordance with the provisions of the Tax Acts applicable to those Cases respectively. (3) The Cases are— MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC Case I: tax in respect of any trader carried on in the United Kingdom or elsewhere … ……… Case III: tax in respect of— (a) any interest of money, whether yearly or otherwise, … ………. Case VI: tax in respect of any annual profits or gains not falling under any other Case of Schedule D and not charged by virtue of Schedule A, C and E.”
“Case III: tax in respect of— (a) profits and gains which, as profits and gains arising from loan relationships, are to be treated as chargeable under this Case by virtue ofChapter II of Part IVof the Finance Act 1996 ; …”
“Subject to the following provisions of this section, a company has a loan relationship for the purposes of the Corporation Tax Acts wherever— (a) the company stands (whether by reference to a security or otherwise) in the position of a creditor or debtor as respects any money debt; and (b) that debt is one arising from a transaction for the lending of money.”
“100 Interest, and exchange gains and losses, on debts etc not arising from the lending of money (1) For the purposes of the Corporation Tax Acts, a company has a relationship to which this section applies in any case where— (a) the company stands, or has stood, in the position of a creditor or debtor as respects a money debt; (b) the money debt is not one which arose from a transaction for the lending of money (so that, in consequence of section 81(1)(b) above, there is no loan relationship); and (c) the money debt is one— (i) on which interest is payable to or by the company; or (ii) in relation to which exchange gains or losses arise to the company; and references to a relationship to which this section applies, and to a company's being party to such a relationship, shall be construed accordingly. (2) Where a company has a relationship to which this section applies— (a) this Chapter shall have effect in relation to the interest payable under, or the exchange gains or losses arising to the company from, the relationship as it has effect in relation to interest payable under, or (as the case may be) exchange gains or losses arising to the company from, a loan relationship to which the company is a party; but (b) the only credits or debits to be brought into account for the purposes of this Chapter in respect of the relationship are those relating to the interest or (as the case may be) to the exchange gains or losses; and, subject to paragraph (b) above, references in the Corporation Tax Acts to a loan relationship accordingly include a reference to a relationship to which this section applies.”
“103 Receipts after discontinuance: earnings basis charge and related charge affecting conventional basis (1) Where any trade, profession or vocation the profits of which are chargeable to tax under Case I or II of Schedule D has been permanently discontinued, tax shall be charged under Case VI of that Schedule in respect of any sums to which this section applies which are received after the discontinuance. (2) Subject to subsection (3) below, this section applies to the following sums arising from the carrying on of the trade, profession or vocation during any period before the discontinuance (not being sums otherwise chargeable to tax)— (a) where the profits for that period were computed by reference to earnings, all such sums in so far as their value was not brought into account in computing the profits for any period before the discontinuance, and (b) where those profits were computed on a conventional basis (that is to say, were computed otherwise than by reference to earnings), any sums which, if those profits had been computed by reference to earnings, would not have been brought into the computation for any period before the discontinuance because the date on which they became due, or the date on which the amount due in respect thereof was ascertained, fell after the discontinuance … . . . . . . . 106 Application of charges where rights to payments transferred (1) Subject to subsection (2) below, in the case of a transfer for value of the right to receive any sum to which section 103, 104(1) or 104(4) applies, any tax chargeable by virtue of either of those sections shall be charged in respect of the amount or value of the consideration (or, in the case of a transfer otherwise than at arm's length, in respect of the value of the right transferred as between parties at arm's length), and references in this Chapter, except section 101(2), to sums received shall be construed accordingly. (2) Where a trade, profession or vocation is treated as permanently discontinued by reason of a change in the persons MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC carrying it on, and the right to receive any sum to which section 103 or 104(1) applies is or was transferred at the time of the change to the persons carrying on the trade, profession or vocation after the change, tax shall not be charged by virtue of either of those sections, but any sum received by those persons by virtue of the transfer shall be treated for all purposes as a receipt to be brought into the computation of the profits of the trade, profession or vocation in the period in which it is received.”
“Where a company begins or ceases to carry on a trade, or to be within the charge to corporation tax in respect of a trade, the company's income shall be computed as if that were the commencement or, as the case may be, discontinuance of the trade, whether or not the trade is in fact commenced or discontinued.”
“For the purposes of Case I or II of Schedule D the profits of a trade, profession or vocation must be computed [on an accounting basis which gives a true and fair view] [2002: in accordance with generally accepted accounting practice], subject to any adjustment required or authorised by law in computing profits for those purposes.”
“[99] Mr Goldberg referred us to Davis (Inspector of Taxes) v Powell[1977] STC 32 ,[1977] 1 WLR 258 , a case on capital gains tax. There a tenant farmer surrendered his lease of agricultural land in consequence of a notice to quit from his landlord. The landlord paid him statutory compensation for disturbance unders 34 of the Agricultural Holdings Act 1948 . The tenant was assessed to capital gains tax on the compensation on the ground that it was a capital sum derived from an asset, namely the lease, and in particular was received in return for the surrender of rights. [100] In the High Court, on appeal from the general commissioners, Templeman J held that the compensation was not derived from an asset. He said ([1977] STC 32 at 35,[1977] 1 WLR 258 at 260): 'What is said in this case is that the taxpayer had a lease and that lease was an asset; it was property of some form. He disposed of that asset by accepting the notice to quit which was given and by getting out, and he derived a capital sum from the asset when he did so. The capital sum was the amount of the compensation under s 34, which, as I have said, was£591 . It does not seem to me that the compensation paid under s 34 is MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC derived from the asset, namely the lease. It is not derived from an asset at all: it is simply a sum which Parliament says shall be paid for expense and loss which are unavoidably incurred after the lease has gone. [101] Drummond (Inspector of Taxes) v Austin Brown[1984] STC 321 ,[1985] Ch 52 , was another case concerning capital gains tax. There the taxpayer gave up possession of certain business premises of which he was the tenant, and received compensation under section 37of theLandlord and Tenant Act 1954 . The taxpayer was assessed to capital gains tax on the footing that the payment constituted a capital sum derived from an asset (the lease) or, alternatively, that it was compensation for the loss of an asset. It was held by the Court of Appeal, following Davis v Powell, that the taxpayer's right to compensation on the termination of the lease was not derived from the lease. Giving the judgment of the court, Fox LJ said ([1984] STC 321 at 324,[1985] Ch 52 at 59): 'In our opinion the£31,384 was not derived from the lease. The word “derive” suggests a source. The right to the payment was, in our view, from one source only, namely the statute of 1954. The lease itself gives no right to such a payment. It was the statute, and the statute alone, which created the right to the payment. The statute simply created an entitlement where none would otherwise have existed. And in creating that entitlement it did[2012] SFTD 723 at 754 not require that any provisions were to be written into the lease. Thus, there is no deeming provision which would in any way require one to treat the lease as being the source of the entitlement. [102] Mr Goldberg also took us to the headnote of FJ Chalke Ltd v Revenue and Customs Comrs[2009] EWHC 952 (Ch) ,[2009] STC 2027 , where, in a claim for compound interest on repayment of overpaid VAT, it was held that s 80(7) was clear and unambiguous in providing that the only basis on which HMRC were liable to repay overpaid VAT was by means of a claim under s 80(1). It left no room for the co-existence of other remedies for the recovery of overpaid VAT from HMRC. The interest claimed, whether simple or compound, could only be interest in respect of the VAT which was overpaid and which had been repaid, namely interest on the principal sums.”
“[103] Except in the case of RGL, the amounts that are the subject of these appeals do not derive directly from HMRC, but were paid by, or at the direction of, the representative member which was itself entitled to be paid both the principal sums in MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC respect of overpaid VAT, and interest on those sums. Payments made by, or on behalf of, the representative member do not have as their source the statute under which the payments have been made to the representative member. [104] RGL, on the other hand, received VRP 5 from HMRC as representative member of the relevant group. If Mr Goldberg's first proposition is correct, it would mean that the source of the payment would not be the trades of Kay & Company, Abound and RGL itself, but only the statutory provision under which VRP 5 was paid, namely s 80(1) VATA. [105] We do not accept this proposition. The question is not under what legal machinery the payment is made, but what the payment was in substance for. The source of the right to the payment is part of the matrix of facts which will provide the answer to that question, but it is not itself decisive. That much, we consider, is clear from London & Thames Haven Oil Wharves Ltd v Attwooll (Inspector of Taxes) (1966) 43 TC 491,[1967] Ch 772 , to which Mr Gammie referred us. [106] That case concerned the question whether a payment of compensation for loss of use of a fixed asset used in the taxpayer's trade was chargeable to tax under Case I of Sch D as a revenue receipt. The principles to be applied were explained by Diplock LJ in the Court of Appeal ((1966) 43 TC 491 at 515,[1967] Ch 772 at 815-816) 'I start by formulating what I believe to be the relevant rule. Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received instead of the compensation. The rule is applicable whatever the source of the legal right of the trader to recover the compensation. It may arise from a primary obligation under a contract, such as a contract of insurance, from a secondary obligation arising out of non-performance of a contract, such as a right to damages, either liquidated, as under the demurrage clause in a charterparty, or unliquidated, from an obligation to pay damages for tort, as in the present case, from a statutory obligation, or in any other way in which legal obligations arise. But the source of a legal right is relevant to the first problem involved in the application of the rule to the particular case, namely, to identify what the compensation was paid for. If the solution to the first problem is that the compensation was paid for the failure of the trader to receive a sum of money, the second problem involved MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC is to decide whether, if that sum of money had been received by the trader, it would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the date of receipt, that is, would have been what I shall call for brevity an income receipt of that trade. The source of the legal right to the compensation is irrelevant to the second problem. The method by which the compensation has been assessed in the particular case does not identify what it was paid for; it is no more than a factor which may assist in the solution of the problem of identification. I will not again traverse the cases. They seem to me to be directed to the solution of one or other of these two problems, which are not always distinguished in the judgments. In the course of these judgments, different metaphors and similes (appropriate no doubt to the particular facts of the case) have been used. But I do not think that any of these conflict with the rule as I have expressed it. [107] In this case s 80 VATA operates to provide a means whereby overpayments of VAT may be recovered. That is a relevant factor in identifying why the payment has been made. The payment is made by virtue of the statute, but that does not determine the underlying source. That can only be determined by the answer to the further question, which is what in substance the payment is for. We do not consider that the cases on capital gains tax can assist the analysis, so clearly set out by Diplock LJ.”
“[68] The combined effect of all these provisions is in my judgment enough to make it crystal clear that the s80 regime for the recovery of overpaid VAT was intended by Parliament to be both exclusive and exhaustive where the circumstances are such as to fall within the scope of the section. . . . . . . . . [72] The significance of this point, in my view, is that since s80 (as I have held) provides an exclusive regime for recovery of the overpaid VAT, any right to recover interest on the MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC repayment as a matter of domestic law must likewise be found within the confines of the statutory scheme, that is to say either in, or through , s78 . . .”
“[117] In looking at those relevant circumstances, Lord Emslie considered that the fact that the payment was voluntary was neutral. He went on to conclude ([1975] STC 434 at 441, 51 TC 42 at 49–50): 'In spite of the fact that there was no agreement between the taxpayer company and the club requiring the club to make any such payment to the taxpayer company and that the payment was not in respect of services rendered by the taxpayer company to the club in the past and that the taxpayer company gave no undertaking in return for the donation, I am of opinion that the payment was made in order that the taxpayer company might use it in their business, and that in substance and in form it was a payment made to a trading company artificially to supplement its trading revenue from curling and in order, in the interests of the club and its members, to preserve the taxpayer company's ability to continue to provide curling facilities in the future. In its quality and nature this payment was of a business nature. It was accordingly a trading receipt in the hands of the MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC taxpayer company and the question of law should be answered in the negative.' [118] Mr Goldberg submitted that the important point in Falkirk Ice Rink was that the voluntary payment was made by a customer. We accept this, but the derivation of the payment is not decisive of its nature. What is important is the quality and nature of the receipt. [119] We conclude from this that we are unable to accept Mr Goldberg's second proposition. There is no rule that, in order to be trading receipts, sums not directly derived from his basic trading activities must be paid for a specific trading purpose. The only principle is that one must have regard to the character of the receipt, and the purpose of the payment, or the motive of the payer, is relevant only in so far as it bears upon that question. All the relevant circumstances must be taken into account. We accept Mr Goldberg's submission that in Smart the fact that the payments were required by the statute to be used in the business was decisive, but that is not the principle to be derived from that case or from any of the other authorities.”
“Not every receipt by a trader in the course of his business is a trading receipt in the income tax sense and whether a particular payment to a trader is to be regarded as a trading receipt is one which must be answered in each case in which the question arises in light of all the relevant circumstances.”
“. . .As I understand the matter, the principle that justified the attribution of something that was in fact received in one year to the profits of an earlier year, as in such cases as Isaac Holden & Sons Ltd v Commissioners of Inland Revenue 12 TC 768 and Commissioners of Inland Revenue v Newcastle Breweries Ltd 12 TC 927, was just this, that the payments had been earned by services given in the earlier year and therefore a true statement of profit required that the year which had borne the burden of the cost should have appropriated to it the benefit of the receipt. The principle is clearly stated in the speech of Lord Simon in Commissioner of Inland Revenue v Gardner Mountain and D’Ambumenil Ltd 29 TC 69 at page 93: “In calculating the taxable profit of a business on Income Tax principles . . . services completely rendered or goods supplied, which are not to be paid for till a subsequent year, cannot, generally speaking, be dealt with by treating the taxpayer’s outlay as pure loss in the year in which it was incurred and bringing in the remuneration as pure profit in the subsequent year in which it is paid, or is due to be paid. In making an assessment to Income Tax under Schedule D the net result of the transaction, setting expenses on the one side and a figure for remuneration on the other side, ought to appear (as it would appear in a proper system of accountancy) in the same year’s profit and loss account, and that year will be the year when the service was rendered or the goods delivered . . .”
“ . . . The accepted qualification on the primacy of correct accountancy treatment has usually been described, as Pennycuick J described it, by saying that the treatment must comply with the statutory provisions. This, of course, reflects the fact that income tax is a creature of statute. But there are also references in the cases to income tax principles, such as Lord Reid’s invocation of the “non-statutory principle” that neither profit nor loss should be anticipated. With great respect I would suggest that this might equally be described as a MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC restatement in a particular context of the statutory rule, ins60 of the Income and Corporation Taxes Act 1988 , that tax shall be charged “on the full amount of the profits or gains of the year” - no more and no less. But whatever the context of the expression “the principles of income tax law” may be I conclude, as did Pennycuick J, that the law does not enable or require us to ascertain the profit of a trade on the a basis divorced from the principles of commercial accountancy.”
“If in all the circumstances it was not possible to bring the sums into account in the years in which they were earned, as I will assume to be the case, the result is not to change the character of the payment but to exhibit that some professional earnings may escape the Income Tax net.”
“[128] We referred earlier to our views on the meaning of section 42 FA 1998. On this basis, we accept that the mere fact that sums have been included in the appellants' profit and loss accounts, it does not follow that they are liable to tax. As we have found, the threshold question whether a receipt is a trading receipt must first be determined. The accounting MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC treatment is an element of that enquiry, but it is not determinative.”
“I am not therefore, persuaded that the Crown is right to start from the proposition that because the payments were originally received in the course of trade the subsequent appearance in the company’s profit and loss account of a sum in respect of profit which can be related to those receipts necessarily means that that sum has the character of profits from the trade for corporation tax purposes. . . . .. . . In my judgment, both the beginning and the end of the inquiry should be to consider the source of the profit which has been properly recognised as income in these accounts. . . .”
“The law of contract draws a clear distinction between a claim for payment of a debt and a claim for damages for breach of contract. The distinction and its consequences are set out in Chitty on Contracts 27th ed (1994) vol 1, p 1046, para 21-031. As there stated, a debt is a definite sum of money fixed by the agreement of the parties as payable by one party to the other in return for the performance of a specified obligation by the other party or on the occurrence of some specified event or condition; whereas damages may be claimed from a party who has broken his primary contractual obligation in some way other than by failure to pay such a debt.”
“[65] Counsel for HMRC emphasised Lord Emslie’s statement [in the Falkirk Ice Rink case] that the fact that the payment was voluntary was neutral and Lord Cameron’s statement that this was a factor to be taken into account, but not a major factor. She submitted that this again showed that it was not necessary for a receipt to be a trading receipt that the recipient was legally entitled to it. I agree. [66] Counsel for Pertemps submitted that the decisive factor in that case was the purposes of the payment. That is true, but it does not alter the fact that the taxpayer was not legally entitled to the money and yet it was held to be a trading receipt. Counsel for Pertemps emphasised the rather unusual facts of the case, and in particular the very close relationship between the club and the taxpayer, suggesting as I understand it that it was an exceptional case. In my judgment those particular factual circumstances are immaterial to the present issue. . . . . . . MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC [79] Returning to Pertemps’ argument summarised at [31] above, I do not accept it for the following reasons. First, as counsel for HMRC pointed out, there is no requirement in s18(1)(a)(ii) of ICTA that the trader be legally entitled to the receipt making up the profits. Secondly, Greene MR did not say that there was such a requirement in Morley v Tattersall. It is true that he held that the money was the client’s money, and that it follows from this that Tattersall was not legally entitled to it; but it does not follow that legal entitlement is a sine qua non for a trading receipt. Thirdly, I consider that the review of the authorities above, and in particular Comr of Income Tax v Savundranyagam, Simpson v Reynolds and IRC v Falkirk, shows that legal entitlement is not a prerequisite. Fourthly and most fundamentally, the fact that a payment is made in circumstances such that the payer has a restitutionary claim to repayment of that sum does not mean that the recipient is not legally entitled to receive it. On the contrary, the recipient is legally entitled to receive and keep the money unless and until a claim for repayment is made. That is why no one suggests that Pertemps has done anything wrong in keeping the money mistakenly paid by its customers. . . . . . [84] Finally, counsel for Pertemps argued that the purpose of the mistaken payments in the present case was not such as to make them trading receipts, in contrast with the payments in cases such as IRC v Falkirk. I disagree. On the facts found by the tribunal, the mistaken payments derived from the business relationship between Pertemps and its customers, were made by the customers in the belief that they owed money to Pertemps for services supplied by Pertemps and were an unavoidable incident for Pertemps’ trade. Having regard not only to the nature of the payments (money which upon receipt became Pertemps’), but also their purposes (money paid for the reasons I have just stated), the tribunal was entitled to conclude that they were trading receipts. . . . . . [86] On this basis, she argued that, since Pertemps’ profits as stated in its accounts included the mistaken payments, and those accounts gave a true and fair view and were in accordance with generally accepted accounting principles, the MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC mistaken payments were properly to be regarded as trading receipts. . .. . [91] As to the merits of the argument, it seems to me that this point lends additional support to the tribunal decision, but is not conclusive on its own.”
“[127] We agree with Mr Gammie that there is nothing in the decided cases that supports Mr Goldberg's third proposition. As Hart J said in Tapemaze, the starting point and the end point is the source of the profit, and there is no inherent likelihood or unlikelihood of the result that can be based on the fact that a recovery is attributable to a trading activity in an earlier period. The question is whether the actual receipt or accrual arose from the trade.”
“[26] Mr Goldberg invited us to conclude from this that, although the representative member has statutory rights and duties, it does not have any common law rights and duties. In particular, he argued, it [sic] activities did not give it common law rights or obligations to the other members of the VAT group. Mr Gammie argued that all that Thorn could be taken to have decided in this respect was that the effect of the statutory provision is not to give rise to a legal capacity in the nature of those set out in s 73(5). [27] We agree with Mr Gammie. We accept, as he argued, that the statutory regime imposed by s 43 does not inhibit the relationship as between the representative member and other group members regarding contributions from one to another, or as regards amounts recovered by the representative member and then accounted for to the members of the group. What rights in this respect exist between the representative member and other group companies is a question to be determined in the circumstances and on the available evidence in each case.”
“[32] In our view, within a group, when payments are made there may be no clarity as to the legal status of those payments at a particular time, or whether they are made by reference to specific legal rights. But that does not mean that, as between members of a group, payments that are made in the absence of an identifiable right are necessarily in the nature of gifts. We do not regard the inter-company payments to which Mr Griffin referred in his statement as gifts from the operating companies to the representative member. We had no other evidence as to the manner in which the GUS group operated its treasury function. Where no identifiable right exists, but a payment is made, it will often be the case that such a payment recognises an obligation, on the one hand, and an entitlement on the other. [33] We agree with the submission of Mr Gammie that the obvious way in which groups of companies will approach the issue of accounting for VAT is for the companies that (ignoring the group fiction) make the supplies to fund the payment of VAT by the representative member, and to account for those payments in their own individual accounts. The corollary to that is that repayments of overpaid VAT will be expected to flow in the opposite direction. For all purposes other than VAT, the group companies are individual companies in their own right, and, if they operate in a commercial manner, would be expected to ensure that any depletion of their assets as a consequence of the overpayment of VAT would be redressed by receipt of the corresponding repayment. [34] In the case of the payments of amounts equal to part of VRP 1 and IP 1 by GUS plc to SDG, at the direction of March UK, we find that these were not gifts by GUS plc, but a payment in recognition of the position, accepted as between independent parties acting at arm's length, that the right to the repayments belonged to SDG. That acceptance can be explained only by the fact that the repayments related to the supplies made in the trade of SDG and the trade of RGL which was transferred to SDG on25 November 2000 . [35] We find also that the payments made by LL to SDG were not in the nature of gifts. There is no evidence of the repayments of VAT to LL being regarded as an asset of LL. They were not treated as such in LL's accounts. Nor is there any evidence that LL chose to give away amounts equal to the relevant part of VRP 1 and IP 1 rather than investing those amounts by way of equity or loan or making distributions. If these amounts had been paid to SDG by way of gift, we would expect to have seen clear evidence in the accounts of LL of MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC ownership of the relevant sums, and minutes showing the making of a gift or capital contribution. The natural implication is that LL as the representative member immediately passed the payment to SDG as the company accepted by the group to be entitled to it, as beneficial owner, and we so find.”
“[129] In our view, applying the principles we have derived from the authorities, the VAT repayments received by each of the appellants were trading receipts. We have found in each case that the appellants were beneficially entitled to the payments, and that those payments were not made by way of gift. [130] We have concluded that the fact that the payments in respect of overpaid VAT were made by HMRC to the representative member (or to an agent on behalf of the representative member) under the statutory provisions of s 80 VATA does not mean that the receipt, even in the case of VRP 5, cannot be a trading receipt. The fact that those payments are required to be made by a statutory provision relating to overpaid VAT is a relevant factor in determining what the payments were for, both when made by HMRC, and also when made by the relevant representative member. [131] We are required, in determining the character of the receipts, to take account of all relevant circumstances. Having regard to the statutory derivation of the payments, the underlying reasons why overpayments of VAT had arisen, and the transfers of trades within the groups, we conclude that the payments were to compensate for depletions in the trading results of the various companies whose supplies had given rise to the VAT overpayments, and the payments were directed to the companies that were carrying on those trades or had succeeded to them, save only for the case the payment of VRP 2 to SDG which, as we have found, retained the right to that payment on the transfer of its trade to SDHSL. The payments restored amounts which would have been brought in as trading profit if there had been no overpayments of VAT. The character of the receipts in the hands of each of the appellants was accordingly, in our view, that of trading receipts. [132] There is, as Pertemps confirms, no requirement that a trader should be legally entitled to the receipts which make up the traders' profits. Thus, even if, contrary to our finding that SDG and RGL were beneficially entitled to VRP 2 and VRP 5 respectively, there might be some doubt as to the legal rights retained by GUS plc, Kay & Company and Abound in respect MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC of VRP 2 and VRP 5, no competing claim to those payments was made, and there is, in our view, no reason on the facts in relation to VRP 2 why the payment should not be treated as a trading receipt in the hands of SDG, nor in relation to VRP 5 why the payment should not be treated as a trading receipt of RGL. Those receipts nevertheless would bear the character of trading receipts. Any competing claim might, as noted by Hart J in Tapemaze, have affected the issue of whether there was a profit of a revenue nature to be recognised, but not the question whether there was a trading receipt. [133] We agree of course with Mr Goldberg that Pertemps cannot in any respect override Morley v Tattersall, which was distinguished in that case. But we do not agree with his submission that this case is closer to Morley v Tattersall. In that case the auctioneers were never beneficially entitled to the moneys they received in a fiduciary capacity for their clients. That was in contrast to the position in Pertemps, where the mistaken payments were the property of Pertemps, albeit that the customers had a right of restitution. We have found in each case that the appellants were beneficially entitled to the VAT repayments. That was the case even in relation to SDG's receipt of VRP 2 and RGL's receipt of VRP 5, where we have found that any rights that were retained by GUS plc, Kay & Company and Abound were not rights against SDG, in the case of VRP 2, or RGL in the case of VRP 5 and that any claim by those companies against SDG or RGL would have to have been made in restitution. [134] In our view, in each case the true source of each of the VAT repayments was the trade in the course of which the original overpayments of VAT arose. The VAT repayments were, accordingly, trading receipts arising out of those trades.”
“The mere payment of a sum of money or a cheque is not evidence of the creation of a loan; nevertheless there is a prima facie obligation to repay in the absence of circumstances giving rise to a presumption of advancement.”
“[74] Nevertheless, our analysis of the position of VRP 2 in relation to SDG is equally applicable to the position of VRP 5 and RGL. Any rights to VRP 5 that were retained as at1 April 1997 by Kay & Company and Abound on the transfers of their MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC respective trades and assets to RGL could not at that time have been rights against RGL. The Kay & Company agreement merely excluded those rights from the sale and did not impose any obligation on RGL, by way of indemnity or otherwise, to make payments in those respects to Kay & Company, and we infer that the same was true for the Abound agreement. It was entirely consistent therefore for the group to have considered that RGL was entitled to the payments, not only as a matter of mechanics as the representative member, but as the company carrying on its own business and as successor to the businesses of Kay & Company and Abound against which the VAT had been wrongly charged. No claims were made by Kay & Company or Abound, and if such claims had been made they would, in our view, have to have been restitutionary claims. RGL accordingly properly treated the payment as belonging to it and brought it into account as an exceptional item within cost of sales in its profit and loss account. We find that RGL was entitled to VRP 5 as beneficial owner of that amount, and not merely as representative member.”
“Payment of the money having been admitted, prima facie that payment imported an obligation to repay in the absence of any circumstances tending to show anything in the nature of a presumption of advancement.”
“13.1 General The only person who is entitled to make a claim, whether undersection 80 of the VAT Act 1994 , or undersection 25 of the VAT Act and regulation 29 of theVAT Regulations 1995 is: the person who (1) accounted for the output tax or (2) incurred the input tax in the course and furtherance of his taxable activities; or a person to whom the right to make the claim has been assigned or transferred by that person. . . . . .”
“[44] The trade of RGL was transferred to SDG on25 November 2000 , as we have described earlier. According to our finding above, this transfer, although it otherwise included all the assets of the trade of RGL, did not include the rights to VRP 2 and IP 2 which had been reserved to GUS plc, Kay & Company and Abound. It did, however, include RGL's own rights in respect of supplies made in the period from1 April 1996 to30 September 1996 .”
“[61] March UK regarded SDG as entitled to the payment in respect of the overpayments, and consequent depletions in the assets of, the trades formerly carried on by SDG, including those transferred by GUS plc, Kay & Company, Abound and RGL. Any rights to VRP 2 and IP 2 that were retained as at1 April 1997 by GUS plc, Kay & Company and Abound on the transfers of the respective trades and assets to RGL could not at that time have been rights against RGL, which became the representative member of the group only on7 August 1997 , nor were they rights against SDG. Furthermore, whilst on1 April 1997 it would have been Kay & Company that had the right, as representative member at that time, to repayment from HMRC of VRP 2, it had ceased to be representative member on6 August 1997 and no longer had that right at the time of the repayment itself. At the time of the repayment, the only right that GUS plc, Kay & Company and Abound could have had in that respect was a right against the then representative member, Argos Ltd. Any claim by any of those companies against SDG would therefore have to have been a claim in restitution. SDG accordingly received VRP 2 and IP 2 as beneficial owner at the time of receipt and was entitled to bring those payments into its own accounts as an exceptional item in relation to VAT and related interest.”
“[45] By an agreement dated28 October 2005 the trade of SDG was transferred to SDHSL (then called Littlewoods Home Shopping Ltd). By cl 2.2 of that agreement it was provided that: 'The Assets comprised in the sale and purchase hereby agreed are all of the undertaking and the assets of the Vendor used wholly or mainly in the Shop Direct Home Shopping Business at the Effective Date including the Vendor's right and title, such as it has, in the following: … 2.2.8 all the Vendor's rights against third parties which relate to the Shop Direct Home Shopping Business or the Assets …' [46] The expression 'Assets' is itself a defined term. Clause 1.1 provides that assets means: 'all the Vendor's rights and title in the undertaking and the assets owned by the Vendor and used wholly or mainly in the Shop Direct Home Shopping Business as more particularly described in clause 2.2 as reflected in the management accounts MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC of the Vendor for the period ended28 October 2005 excluding for the avoidance of doubt the Excluded Assets.' [47] Mr Goldberg submitted that this agreement transferred all of SDG's remaining rights to VRP 2 and IP 2 to SDHSL, so that SDG did not, after28 October 2005 , when it ceased to trade, have any such rights. Mr Gammie argued that the agreement expressly excluded such rights, because the assets had to be reflected in the management accounts of SDG for the period ended28 October 2005 . Given that VRP 2 was brought into account only in 2008, the only conclusion is that management accounts would not have reflected the right to VRP 2. [48] We do not have the benefit of the management accounts. Our own construction of the agreement is that it was important for the relevant assets to be identified in the management accounts, and that only assets that were so identified would have been transferred to SDHSL. This is because the consideration for the transfer of the assets was the assumption by the purchaser of the liabilities, and it was agreed that SDG would owe SDHSL, as an interest-free loan, repayable on demand, an amount equal to the excess of the liabilities over the book value of the assets. We agree with Mr Gammie that the management accounts must be considered not to have included the value of the VAT repayments, and consequently no book value would be attributable to such a right. In our view, SDG would not have wished to incur indebtedness to SDHSL whilst at the same time transferring to SDHSL assets which, because they were not included in the management accounts, would not have reduced the amount of that indebtedness. Accordingly, we conclude that such rights as SDG had to payment of VRP 2 and IP 2 were retained by it and not transferred to SDHSL.”
“the home shopping catalogues business carried on by the Vendor as at the Effective Date including the web sites, and the Properties and including assets relating to the production of the home shopping catalogues.”
“all the book and other debts arising out of or attributable to the operation of Shop Direct Home Shopping Business owed to the Vendor at the Effective Date”
“If following Completion it comes to the Purchaser’s attention that, any asset or shareholding which immediately prior to Completion formed part of the Shop Direct Home Shopping Business, other than the Excluded Assets, has not been transferred to, or has not vested in, the Purchaser and remains held by the Vendor and the Purchaser give the Vendor written notice of the same, the Vendor shall transfer or procure the transfer of such asset to the Purchaser on terms that no further consideration is payable.”
“[49] During the hearing HMRC produced some further documentation which, Mr Gammie submitted, demonstrated that the right to the payment of VRP 2 and IP 2 could not have been transferred to SDHSL. The documents comprised a deed of discharge and release ('the Argos deed') dated12 September 2007 addressed to HMRC and executed by Experian Finance plc (formerly GUS plc) and Argos Ltd (companies not connected to the appellants), and extracts from some minutes of board meetings of certain companies in the appellant group, namely SDG, RGL, Kay & Company, Abound and Littlewoods Company Director Ltd. [50] The Argos deed refers to a request that had been made to make payments in accordance with Business Brief 113/06 to SDG, including amounts which HMRC had accepted, subject to final resolution of the Fleming and Condeì Nast appeals (see Fleming (t/a Bodycraft) v Revenue and Customs Comrs, Condeì Nast publications Ltd v Revenue and Customs Comrs[2008] UKHL 2 ,[2008] STC 324 ,[2008] 1 WLR 195 ), had been overpaid by companies which were at the relevant times members of the Argos VAT group. The deed records that HMRC had agreed to make the relevant payment to SDG on condition that it received an undertaking from SDG to repay the amount in certain circumstances, backed by a bank guarantee, MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC and releases from Experian and Argos, and also from RGL, Kay & Company and Abound, which companies, the deed recites 'HMRC have been informed became entitled to receive from HMRC any repayment pursuant to the [relevant repayment claims] when the GUS home shopping business was sold to March UK …'. The board minutes of the various companies show that deeds of discharge and release consistent with the condition under the Argos deed were approved and authorised to be executed, but we did not see any evidence of those deeds themselves. [51] The board minutes of SDG refer to the undertaking from that company in favour of HMRC, and the bank guarantee. They also make reference to a deed of appointment whereby WGM was to be appointed as agent of SDG to receive the relevant payment. All these documents were considered and approved for execution by SDG. [52] We have found, on our construction of the agreement for the transfer of SDG's trade to SDHSL, that SDG retained such rights to VAT repayments as it had at that time, which would exclude the rights which were retained by GUS plc, Kay & Company and Abound. We are not persuaded that the reference to companies, including Kay & Company and Abound, becoming entitled to receive certain payments from HMRC is indicative of the creation of an entitlement only at the stage of the sale of the home shopping business. The Argos deed says nothing about the entitlement of those companies as against other companies, including Argos Ltd and March UK. It deals only with the entitlement to receive payments from HMRC which, as we have seen, as a statutory matter could be paid only to the representative member. What this deed appears to demonstrate is that HMRC had been persuaded that it could pay WGM as agent for SDG, and that HMRC had agreed this course but only if it had protection against claims that might otherwise be made by companies claiming to be themselves entitled. [53] To the extent that the Argos deed tells us anything, we consider that it supports our analysis of the agreements for the transfers of the trades of Kay & Company and Abound to SDG, and the transfer of the trade of SDG to SDHSL. The deed recognises rights in Kay & Company and Abound, but does not refer to any such rights in SDHSL. [54] Mr Goldberg also referred us to a passage in Littlewoods Retail Ltd v Revenue and Customs Comrs[2010] EWHC 1071 (Ch) ,[2010] STC 2072 , which relates to the assignment to SDG by representative members of the GUS plc group of claims to compound interest. Those assignments were made on6 May 2008 , so after the payments of VRP 2 and IP 2 (see MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC [20]). Mr Goldberg argued that this demonstrated that the parties themselves considered that such an assignment was necessary, and that SDG at the time of VRP 2 and IP 2 did not have the right to those payments. We do not consider that the fact of these assignments assists the appellants. All they show is that the group recognised, as was common ground in that case (see [22]), that where a representative member had paid the tax, that company was the correct claimant as a matter of law. It is evident, however, that the group itself was of the view, in common with the position it had adopted in relation to VRP 1 and IP 1, and VRP 2 and IP 2, that the real beneficiary, as between members of the group, was SDG, and that it was right therefore for the claims to be assigned to SDG. In our view, therefore, this supports a conclusion that SDG was, as far as the group was concerned, entitled to the relevant payments. [55] We earlier considered, in relation to VRP 1, the agreement dated27 May 2003 whereby GUS plc sold a number of companies, including SDG, to March UK. We explained how this resulted in GUS plc receiving VRP 1 from HMRC, the acceptance by GUS plc and March UK that the VAT repayments belonged to the relevant acquired companies and the arrangements made whereby VRP 1 was paid by GUS plc to SDG by direction of March UK. [56] Following that sale there was a proposal for the GUS group to be split, with GUS plc going into a separate and independent group from the ARG companies (including Argos Ltd). This would have resulted in the VAT repayments being made by HMRC to the new representative member, within the ARG group, and no longer to GUS plc. The arrangements for payment by GUS plc would no longer operate. [57] That was the background to the letter agreement dated4 October 2006 between March UK, GUS plc and Home Retail Group plc ('HRG'), the putative holding company of Argos plc, to which we referred earlier. As well as confirming the earlier agreement that the rights to VAT repayments and associated interest belonged to the March UK acquired companies, the letter agreement obliged HRG to procure that Argos Ltd would irrevocably appoint WGM (the lawyers) as its agent to receive VAT repayments, and to pay the amount to March UK. March UK agreed to repay to HMRC any amount found to have been paid in error. Subsequently, on9 October 2006 , a deed poll was entered into by Argos Ltd and HRG appointing WGM as agent to receive the relevant VAT repayments and related interest. This arrangement was notified by Argos Ltd to HMRC by fax dated10 October 2006 . [58] VRP 2 and IP 2 were paid to WGM on19 September 2007 . That date is shortly after the date of the Argos deed, and MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC we conclude therefore that the payment was made after the Argos deed had been executed and the other conditions had been satisfied.”
“[138] Mr Goldberg argued that s 103 could apply only to charge the person who had carried on the trade. We do not agree. As Mr Gammie submitted, s 103 does not refer to any particular person on whom the charge is to be levied; it is a charge on the relevant sums to which the section applies, and taxes the receipt of those sums. It is clear, and the historical background of the Stainer's Executors and Cheyney's Executor cases confirms, that personal representatives of a trader may be taxed on post-cessation receipts arising from the discontinued trade of a deceased trader, who will not themselves have carried on the trade. Furthermore, s 103(3) expressly excludes sums received by a person 'beneficially entitled' to them. This in our view indicates that the person to be charged on the sums received is the person entitled to the receipt of the relevant sums, whether or not that person has formerly carried on the trade. [139] Section 106 makes special provision where rights to receipts within s 103 are transferred. Section 106(1) deals with the position where the right to receive the relevant sum has been transferred for value. In such a case tax is charged, not on the amount of the sum received, but on the amount or value of the consideration, or market value, if the transfer is not at arm's length. It was common ground that s 106(1) had no application to these appeals. [140] Section 106(2), on the other hand, is relevant. That applies where the trade is treated as permanently discontinued by reason of a change in the persons carrying it on, and the right to receive the sum to which s 103 would otherwise apply is transferred to the persons carrying on the trade after the change. In those circumstances s 103 does not apply. No person can be charged on the relevant receipts under s 103. Instead, any sum that is received by the persons carrying on the trade is brought into the computation of the trading profits in the year in which it is received. MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC [141] Where there is a transfer within s 106(2), the effect is two-fold. First, s 103 does not apply. This means that no Case VI charge can arise on the receipt, or on the value of the transfer of the right under s 106(1); s 106(1) is expressed to be subject to s 106(2). Absent s 106, the successor trader would have been liable under Case VI on the receipts of the relevant sums as described in s 103. The effect of s 106(2) is to convert that Case VI charge into a charge under Case I on the receipt as part of the computation of the successor's profits. [142] Section 106(2) has two effects, and in our view each of them is independent of the other. If there is a transfer to the successor trader, the effect is that s 103 does not apply, and that is the effect whether or not the amount is received by the successor trader so that it is brought into account in the trading profits of the successor. The charge on the successor is dependent on the successor receiving the relevant sum. If that sum is received by another person, and cannot be treated as received by the successor, that other person cannot, in our view, be charged under s 103. Although Mr Gammie argued that there was nothing to prevent such a person being charged under s 103, we do not agree. It is s 106(2) itself, which provides that tax may not be charged under s 103 if the right to receive the relevant sum has been transferred to a successor trader. [143] We have reached this conclusion, we have to say, with some hesitation. The effect is that, where a trade has discontinued without a transfer of the right to post-cessation receipts, any recipient of those sums arising from the former trade is taxable under Case VI by virtue of s 103. As we have found, this is not confined to receipts by the original trader. On the other hand, where there has been such a transfer, our construction of s 106 is that s 103 must be excluded, and a tax charge can only arise under Case I if the recipient of the relevant sum is the successor trader. A receipt by any other person escapes taxation. Whilst that appears to create a gap in the post-cessation rules, albeit one that is likely to arise only in unusual circumstances, we nevertheless conclude that this is the proper construction of s 106(2). [144] We are conscious also that, in construing s 106(2) in the way we have, we are departing from the description of that provision given by the special commissioners in Rafferty v Revenue and Customs Comrs [2005] STC (SCD) 484(at paras 95 and 96). We were not referred to Rafferty, but in that case the special commissioners drew attention to the purpose of s 106(2) being to preclude the same receipts being brought into computations of profits twice, both on the transferor, under s 103 or s 106(1), and on the transferee as a trading receipt, and MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC to determine that the charge to tax on such receipts falls on the transferee. But the special commissioners then went on to say that s 106(2) provides that tax is not chargeable if the transferee of the trade brings the sums into computation of its profits, and that the transferor is not taxable if he transfers the right to receive the sums to his successor in the trade who pays tax on the same sums. [145] We are unable to construe s 106(2) so as to provide for the same degree of conditionality. In our view, s 103 is excluded by s 106(2) only if the trade is treated as permanently discontinued by reason of a change in the persons carrying it on and if the right to receive the relevant sum is then transferred to the persons carrying on the trade. There is, in our view, no further condition that the successor brings that sum into its computation or pays tax on that sum, although s 106(2) provides that the successor will do so on a receipts basis. [146] We turn now to apply these principles to each of the VAT repayments which are not within those that are taxable on general principles under Case I of Sch D. (1) VRP 1. Certain of the supplies to which VRP 1 relates were made by RGL. We have found that the whole of RGL's trade, together with all rights and entitlements, was transferred to SDG. Section 106(2) applies. In consequence SDG is liable under Sch D, Case I on that part of VRP 1 which derives from RGL's trading. (2) VRP 2. VRP 2 was paid to LW Corporation, the amount being recognised as a receivable in SDG's accounts. There was, for s 103 purposes, a receipt of this sum, to which SDG was beneficially entitled, after SDG had ceased to trade following the transfer of its trade to SDHSL. We have found that SDG retained the right to payment of VRP 2, and did not transfer it to SDHSL. Consequently, s 106(2) does not apply in relation to the transfer of the trade to SDHSL. Section 103 accordingly applies. That part of the VRP 2 that relates to the trades of SDG itself and RGL is correctly assessed on SDG under Case VI by virtue of s 103. We have found that the rights of GUS plc, Kay & Company and Abound to VRP 2 were not transferred to RGL, and cannot therefore have passed to SDG. In relation to those transfers, therefore, s 106(2) does not apply. Section 103 does apply. That part of VRP 2 that relates to the trades of GUS plc, Kay & Company and Abound is correctly assessed on SDG under Case VI by virtue of s 103. MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC (3) VRP 3. The transfer of the home shopping business of LRL to SDHSL carried with it all rights to that part of VRP 3 which related to the supplies of LRL. That part of VRP 3 is accordingly to be brought into account under Case I by virtue of s 106(2). (4) VRP 4. VRP 4 related to the trades of the six companies and LRL. LRL succeeded to the trades of the six companies, with the right to VRP 4, and LRL transferred the home shopping business, along with its rights to VRP 4, to SDHSL. VRP 4 is therefore taxable under Case I by virtue of s 106(2). (5) VRP 5. Part of VRP 5 related to the trades of Kay & Company and Abound which were transferred to RGL. We have found that the rights of Kay & Company and Abound to VRP 5 were not thereby transferred to RGL. Section 106(2) does not apply, but RGL is correctly assessed to the relevant part of VRP 5 under Case VI by virtue of s 103. (6) VRP 6. The supplies giving rise to the repayment were made by the six companies to whose trades and assets, including the right to VRP 6, LRL succeeded. LRL is accordingly correctly assessed on VRP 6 under Case I by virtue of s 106(2). [147] In summary, we have found that all the VAT repayments are trading receipts, either of existing trades or trades that have discontinued, and all are taxable under Sch D, Case I or Case VI as we have described.”
“The Judge seems to have thought that, as the payment was made under a contract, that was enough to bring it within Case VI. I cannot agree with him. It must be a contract for services or facilities provided., or something of that kind. The present case is rather like Leeming v Jones 15 TC 333. If the sum was taxable at all, it was taxable as part of the profits of Mr Ricketts’s trade or profession. Once that is negatived, it becomes simply a sum received in compromise of a disputed claim; whether legal or moral makes no difference. I think that this case does not fall within Case VI.”
“[155] We have held that the VAT repayments made to each of SDG, SDHSL and LRL were made in respect of entitlements that existed between the relevant group companies. We have found that these payments were not made by way of gift, but that, in each case, the recipient was beneficially entitled to the payments. In the same way, the recipients were entitled to be paid, and were paid, amounts equal to the statutory interest received by the representative members from HMRC. As between the representative member and the recipient company that payment has the quality of income, and it has been calculated on the principal amount of the relevant VAT repayment at the statutory rate of interest over the period for which the VAT was repayable. That has the essential quality of recurrence, and we find accordingly that the payments of the IP amounts were interest. [156] That, we think, disposes of the payment of IP 6 to LRL. That payment is taxable under Case III of Sch D. [157] The position of the other payments of interest depends on an analysis of the loan relationships provisions in FA 1996. It is common ground that the interest was not payable on a debt arising from a transaction for the lending of money. There was accordingly no 'loan relationship' within the meaning of section 81 FA 1996. The question, therefore, is whether the interest paid to the relevant appellants can be assimilated to interest arising on a loan relationship by virtue of s 100 of that Act. [158] For s 100 to apply, it is necessary that the appellant in each case stands in the position as creditor as respects a money debt and that the money debt is one on which interest is payable to the appellant. The expression 'money debt' is itself defined by s 81(2). For these purposes it is essentially a debt which falls to be settled by the payment of money. MRS JUSTICE ASPLIN Approved Judgment Shopdirect v HMRC [159] We consider that, in the case of each of SDG (in relation to IP 1 and IP 2), SDHSL (in relation to IP 3 and IP 4) and LRL (in relation to IP 7 and IP 8), the payments were of interest. We have found that the VAT repayments were made, not by way of gift from the representative member, but because within the group the appellant companies were entitled to those payments. That entitlement gave rise to an obligation at the relevant time for the representative members to make the VAT repayments to the appellants. The making of those payments in respect of the entitlements we have found existed at the time is, in the light of our finding that they were not made by gift, evidence of the discharge of the obligations of the representative members in this respect. That, in our view, amounts to a money debt for the purpose of s 100. [160] The interest payments were calculated on the amounts due in respect of the VAT repayments, that is to say on the amounts of the money debts, and by reference to the period for which the VAT was repayable. It is of no consequence that these amounts did not accrue over the entire period that the VAT remained overpaid; they were nevertheless calculated at the relevant time by reference to that period. The interest accordingly arose from the money debt that was discharged on the making of the VAT repayment. [161] Accordingly, we find that all the interest payments were properly assessable on the appellants under Case III of Sch D.”
“Mr Grant advanced a further argument that the added sum was not in the nature of “interest” in the sense of that express in the Income Tax Acts because the added sum only came into existence when the judgment was given and from that moment had no accretions under the order awarding it. . .. . but I see no reason why, when the judge orders payment of interest from a past date on the amount of the main sum awarded (or on a part of it) this supplemental payment, the size of which grows from day to day by taking a fraction of so much per cent per annum of the amount on which interest is ordered, and by the payment of which further growth is stopped, should not be treated as interest attracting income tax. It is not capital. It is rather the accumulated fruit of a tree which the tree produces regularly until payment.”