Shop Direct Group v Revenue and Customs [2016] UKSC 7

Shop Direct Group received a £124m VAT repayment relating to overpaid VAT on trades formerly carried on by other group companies. The Supreme Court held SDG was liable to corporation tax under section 103 ICTA on these post-cessation receipts as beneficial recipient.

Facts

Companies within the Littlewoods corporate group had, over many years between 1978 and 1996, paid substantial sums of VAT to HMRC based on an incorrect understanding of the law concerning supplies made to agents with commission discounts. Following correction, HMRC repaid the overpaid VAT together with statutory interest under sections 78 and 80 of the Value Added Tax Act 1994.

By the time the relevant repayment (referred to as VRP2, totalling £124,963,600) was made in 2007-2008, all of the companies that had originally made the supplies (SDG, RGL, Kay & Co, Abound, GUS plc) had permanently discontinued their trades. Following complex group reorganisations, including the acquisition of various companies by March UK Ltd in 2003, arrangements were made so that the repayment would be paid by HMRC to Shop Direct Group (SDG) via solicitors Weil, Gotshal & Manges. The First-tier Tribunal found that SDG received VRP2 as beneficial owner.

HMRC assessed SDG to corporation tax on the receipt under section 103 of the Income and Corporation Taxes Act 1988 (ICTA), which charges post-cessation receipts of a discontinued trade to tax under Case VI of Schedule D. SDG appealed, having lost before the First-tier Tribunal, the Upper Tribunal and the Court of Appeal.

Issues

The principal issues before the Supreme Court were:

• Whether section 103 ICTA imposes a charge to corporation tax only on the original trader (whose pre-discontinuance trade was the source of the sums), or whether the charge can extend to other recipients such as SDG.
• Whether, in circumstances where a receipt arose from an intra-group transfer of the sum (or rights to it) for no consideration, section 103 imposes a charge.
• Whether section 106 ICTA, dealing with transfers of the right to receive post-cessation receipts, precluded a charge on SDG.

Arguments

Appellant (SDG)

Mr Goldberg QC argued that the maximum sum SDG could properly be taxed on was around £200,000 relating to supplies SDG itself had made in 1986-1987. He submitted: (i) section 103 imposed a charge only on the original trader from whose pre-discontinuance trade the sums arose; (ii) if SDG received a sum equivalent to VRP2 through an intra-group transfer without assignment of rights, section 103 did not apply; (iii) alternatively, if there had been a transfer of rights, section 106 precluded any charge on SDG. He also argued, relying on Hochstrasser v Mayes [1960] AC 376 and Abbott v Philbin [1961] AC 352, that the most proximate cause of the receipt (the intra-group transfer) should determine its character.

Respondent (HMRC)

Mr Gammie QC submitted: (a) there was no basis to read into section 103 a restriction confining the charge to the original trader; (b) section 106(1) applied only to transfers for value, which had not occurred here; (c) section 106(2) only applied if the transferee received the sums while it was trading, which was not the case. He also stressed that SDG had led no evidence on intra-group transactions and could not now invite contrary inferences against the findings of fact.

Judgment

Lord Hodge, delivering the judgment with which the other Justices agreed, dismissed the appeal.

The prior law and statutory purpose

Lord Hodge reviewed the pre-1960 case law, including Bennett v Ogston (1930) 15 TC 374, Brown v National Provident Institution [1921] 2 AC 222, Stainer’s Executors v Purchase [1952] AC 280 and Carson v Cheyney’s Executor [1959] AC 412, which had treated post-cessation receipts as ‘the fruit’ of the discontinued trade and not taxable because there was no continuing source. Sections 32-34 of the Finance Act 1960 (the predecessors of sections 103 and 106 ICTA) were enacted to close this loophole.

Scope of section 103

The Court held that section 103 contains no implicit restriction limiting the charge to the original trader. Three reasons supported this conclusion:

• The statutory wording imposes no limit on the identity of the recipient; the section identifies only the source of the sums (the discontinued trade).
• The mischief addressed was the escape from tax of post-cessation receipts; this loophole would not be effectively closed if the charge were confined to the former trader.
• Neighbouring provisions (sections 105 and 108) distinguish between ‘any person’ (or ‘any company’) and the former trader, indicating that the charge can fall on a wider class of recipients.

Rejection of the source/proximate cause argument

The Court rejected SDG’s reliance on Hochstrasser v Mayes and Abbott v Philbin, holding those Schedule E employment cases had no bearing on section 103. Under section 103, the focus is on the original source of the receipt (the discontinued trade), not the proximate cause within group arrangements.

Section 106(1) and (2)

Section 106(1) was held to apply only to transfers for value, quantifying the charge by reference to consideration or market value. It does not extend to gratuitous transfers. Section 106(2) was construed purposively: it disapplies section 103 only where the transferee receives the post-cessation sums while it is itself trading, in which case the receipt is taxed as a Case I trading receipt instead.

Application to the facts

On the First-tier Tribunal’s findings, none of the intra-group transfers were shown to be for value, so section 106(1) had no application. SDHSL (the transferee of SDG’s trade in 2005) did not receive any of the VAT repayments, so section 106(2) was also irrelevant. SDG received VRP2 as beneficial owner; the sums arose from the carrying on of the discontinued trades before discontinuance and were not otherwise chargeable to tax. Accordingly, section 103 imposed a charge on SDG as recipient.

Implications

The decision confirms that section 103 ICTA (and, by extension, its rewritten counterparts in the Corporation Tax Act 2009) imposes a charge on post-cessation receipts in the hands of the actual recipient, not solely the former trader. The Court summarised the position in four propositions: (i) section 103 charges sums arising from the trade before discontinuance and received afterwards; (ii) there is no restriction in section 103 on who the recipient may be; (iii) section 106(1) quantifies the charge where the former trader transfers rights for value, and imposes it on the transferor; and (iv) section 106(2) disapplies section 103 only where the transferee receives the sums while carrying on the continuing business.

The judgment confirms a purposive interpretation aimed at preventing the loophole identified in pre-1960 case law from being reopened through group restructurings or gratuitous transfers. It is significant for corporate groups undertaking reorganisations involving discontinued trades and dormant entities, particularly in the context of VAT repayments or other deferred receipts attributable to historical trading activity. The decision also illustrates the evidential burden on a taxpayer challenging an assessment: SDG’s failure to lead evidence on the intra-group arrangements precluded reliance on alternative section 106(1) arguments at later stages of the litigation.

The decision is fact-sensitive in its application of section 106(2) and does not address all possible permutations of intra-group transfers, particularly where transferees continue to trade or where transfers occur for value. The Court expressly limited its analysis to the facts found by the First-tier Tribunal.

Verdict: Appeal dismissed. Shop Direct Group is liable to corporation tax under section 103 of ICTA on the VAT repayment of £124,963,600 (VRP2) received in 2007-2008, as a post-cessation receipt arising from the discontinued trades of the relevant group companies.

Source: Shop Direct Group v Revenue and Customs [2016] UKSC 7