Shop Direct VAT repayments were subject to corporation tax, Supreme Court rules

Shop Direct, which is part of the Littlewoods group of companies, had attempted to argue that the repayments had been assigned to it through an intra-group arrangement and should not therefore be taxed as the proceeds of a former trade, by sections 103 and 106 of the  Income and Corporation Taxes Act 1988 (ICTA). The Supreme Court rejected this argument, and in the process upheld the earlier decisions of both the first-tier and upper tier tribunals and the Court of Appeal.

Giving the unanimous judgment of the court, Lord Hodge said that the purpose of the relevant statutory provision was "to make sure that sums which a person received, which arose from a discontinued trade and which were not otherwise taxed, were brought into a charge to tax".

"No sound reason of policy has been suggested for confining the charge to the former trader and his personal representatives," he said.

"The decisions and arrangements within the VAT group of companies about the specific company which was to receive the repayment did not alter the original source of the receipt. The question was whether the sum received arose from the discontinued trade before its discontinuance," he said.

Members of the Littlewoods group of companies made substantial VAT overpayments to HM Revenue and Customs (HMRC) between 1978 and 1996, based on a misunderstanding of the law around their ability to deduct the commission they paid to agents who collected sales from customers from the value of those sales. This particular repayment was made by HMRC in 2007, by which time the companies that had originally overpaid were no longer trading. Instead, Shop Direct received the repayment as 'beneficial owner'.

Under ICTA and previous tax laws dating back to 1960, money paid in respect of a trade, profession or vacation that is no longer trading is liable for corporation tax. These provisions were introduced to prevent businesses from avoiding tax by discontinuing trade during a particular tax year in order to escape corporation tax liability on what would otherwise have formed part of their taxable profits.

The Supreme Court had to consider whether the relevant statutory provisions contained an "implicit restriction" to the effect that only the former trader, whose trade was the source of the income, was liable to pay the corporation tax charge. According to its judgment, this was not the case for three reasons: because of the "clear" wording of the law; because of the "mischief" which the provisions were designed to capture; and because other parts of ICTA "drew a distinction between the person chargeable to tax and the person who had previously carried on the trade".

"[ICTA] specified the source of the sums which fell within the charge but imposed no further restriction on the charge," Lord Hodge said. "In particular, it imposed no limit on who was the recipient of the sums and thus liable to the charge."

The Supreme Court also dismissed an additional argument put forward by Shop Direct, to the effect that the legislation imposed a charge to tax on another entity entirely. Shop Direct had not raised this argument in the first-tier tribunal, and so the Court of Appeal had refused to allow it.

"I also am satisfied that it would not be fair to allow the argument to be advanced at this late stage," Lord Hodge said. "It involves [Shop Direct] inviting the court to make inferences from findings of fact which were not directed to the argument it now wishes to advance."