Shop Direct Group (SDG) has recently lost at the Court of Appeal in its third attempt to challenge corporation tax levied on a large repayment of VAT and interest thereon.
The repayment in question amounted to some £300m and was received by SDG on 19 September 2008. Of this:
- approximately £175m related to the VAT repayment which HMRC repaid purportedly under its statutory obligations (section 80, VATA 1994) on the basis that it represented the aggregate of a series of overpayments between 1978 and 1996 by SDG and associated companies within the same VAT group; and
- approximately £125m was repaid by HMRC purportedly under its statutory obligations (section 78, VATA 1994) on the basis that it was a profit arising from a “loan relationship” (taking a wide view of this concept as defined in section 100(1), Finance Act 1996) under the relevant corporation tax provisions.
Many of the associated companies to which the repayment and interest related were no longer trading, but HMRC levied corporation tax on SDG in respect of these amounts on the basis that they were post-cessation receipts under section 103(1) ICTA 1988.
SDG appealed principally on the basis that section 103(1) ICTA 1988 relates only to the original trader who actually received the sums after a permanent discontinuance of trade. SDG also contended that the First-tier Tribunal (Tax Chamber) had been perverse or erred in law in finding that SDG had been beneficially entitled to any VAT repayment and that, in any event, the VAT payment was not “interest of money” in accordance with section 18(1)(b), ICTA 1988 so as to be chargeable to corporation tax; as a result, SDG could not have stood as a creditor in relation to such repayment to create a qualifying loan relationship.
The Court of Appeal held as follows:
- VAT repayment: the Court agreed with the basis on which HMRC levied corporation tax under section 103(1) ICTA 1988. It held that the repayment was “plainly a sum which arose from the carrying on of the discontinued trades of those companies which had made the VAT overpayments” and that “receipt of the sum by SDG did not lose that character merely because of a process of intra group decision-making about the specific company to which it should be paid.”
- Interest: the Court held that the interest was a money debt and that SDG could have stood as a creditor to create a qualifying loan relationship. It placed particular emphasis on an agreement between SDG and HMRC entered into days before the simultaneous repayment of VAT and interest titled “Undertaking to repay VAT and statutory interest”. It held that the agreement “discloses the clearest possible express contractual obligation by HMRC” to make the VAT repayment to SDG and that it represents “an amply sufficient obligation to fulfil the requirement under [section 101(1)(a), Finance Act 1996] that … SDG stood or had stood in a position of a creditor as respects a money debt.”
It remains to be seen whether SDG takes a fourth bite of the cherry by appealing to the Supreme Court. However, given the large amount of money at stake, it may well seek to do so.
To read the decision click here