“Sleepers: cases more important than they first appear”

1. “Sleepers: cases more important than they first appear” Jonathan Peacock QC Michael Ripley December 2011

2. Cases • Barnes v HMRC [2011] UKFTT 95 (TC) • MJP Media Ltd v HMRC  [2011] UKUT 100 (TCC) • Danfoss A/S and Sauer DanfossApS v Skatteministeriet (C‑94/10) • HMRC v Rank (Joined cases C-259/10 and C-260/10)

3. Barnes: the ‘real’ nature of something Classic sham “acts done or documents executed by [all] the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create” - Snook v London & West Riding Investments Ltd [1967](Diplock LJ) Mislabelling “If the agreement satisfied all the requirements of a tenancy, then the agreement produced a tenancy and the parties cannot alter the effect of the agreement by insisting that they only created a licence. The manufacture of a five pronged implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade.” - Street v Mountford[1985] (Lord Templeman)

4. The beginnings of a doctrine? • “But the question can also arise where, without any question of sham, there is some objective criterion in law by which the court can test whether the agreement the parties have made does or does not fall into the legal category in which the parties have sought to place their agreement” • -Welsh Development Agency v Export Finance Co Ltd [1992] (Dillon LJ)

5. Application in the tax world: Prudential • Hedging transactions • Was Prudential under a “duty to make a payment in consideration of another person's entering into the contract” or (instead) were the payments to be treated as pre-payments of the final currency legs • Contract provided: “[Prudential] shall pay [£] to [RBS] in consideration of [RBS] entering into this Transaction”

6. Prudential • The Special Commissioners decided that the premiums were properly to be regarded as pre-payments of the final currency legs and not in consideration of the counter-party entering into the swap. The High Court agreed. • The CA agreed again: “Nor did such payments acquire… the quality of an inducement. … Payments within s.151(1)(b) are those which the counter-party… requires as consideration for agreeing to enter into the contract to buy or sell the foreign currency. They are conceptually distinct from the sums paid to buy or sell the currency. Only the timing of the payments of principal created what was said to be the need for an inducement. True it is that RBS would not have agreed to sell €500m for as little as £244m but for the payment Prudential made of £65m. But Prudential itself created the need for the inducement by entering into an agreement to pay only £244m on maturity…” (Moses LJ)

7. Part of the main stream? • What exactly did the CA base their decision on? • In what sense were the payments “really” part of the final exchanges of principal? • NB not economic equivalence. • Barnes v HMRC FTT January 2011: citing Moses LJ in Prudential: • “regard must be had to the reality of the arrangements in question...” • MJP Media Services v HMRC UT September 2011: citing Moses LJ in Prudential: • “parties cannot make a transaction answer a description which it does not otherwise answer by saying that it does…”

8. MJP Media: when is a debt not a debt? • The company was a subsidiary of Aegis plc • Sought a deduction in respect of inter-company debt which it had waived • 2 issues: Issue 1: Whether there was a loan relationship Issue 2: Whether any such deduction was available under paras 5 and 6, Sch 9 FA 1996

9. Issue 1 • The taxpayer came to be owed £6.8m • Primary case was that these were advances of cash • Alternatively, the debt arose by virtue of it settling obligations of its parent to third parties • Common intra-group arrangement, especially for payment of (eg) taxes and/or where there is a group treasury company

10. Issue 1 – FTT’s reasons • “Plain meaning” of s81 FA 1996 “does not stretch to include payments to a third party which discharge the debt of another” • Based on Potts’ Executors v IRC [1951] AC 443 • But, the FTT’s reasoning is open to question

11. Upper Tier’s decision • Same two issues • Arnold J only addresses issue 1 and rejects the appeal • Does not interfere with FTT’s findings of fact • Unfortunately, sidesteps the legal question

12. Danfoss: unlawfully levied tax Reimbursement? Danish tax authorities Unlawfully levied excise duty Lubricant oils Lubricant oils Oil companies Cost of the duty

13. Direct claims for reimbursement The ECJ held: • Repayments of unduly levied tax neutralises the economic burden on the consumer • A claim can be refused if the consumer can bring a civil action claim against the supplier… • …unless reimbursement would be impossible or excessively difficult • Member states to provide a procedure for making direct claims

14. Impact • Not restricted to excise duty • Reimbursement claims vs. damages claims • Mere legal right to make a civil claim not sufficient to reject a claim: e.g. where the supplier is insolvent • Application beyond unlawfully levied tax?

15. Rank: Fiscal Neutrality • Fiscal neutrality: “a fundamental principle of the harmonised system” • Nature and origins of the principle have been described inconsistently • Can be invoked: • in support of statutory construction • to challenge the manner in which EC VAT legislation is transposed into domestic law

16. The ECJ’s judgment • Broad implications beyond the betting and gaming industry • HMRC’s approach had been to determine the extent of actual competition • Competition is not a separate condition (para 34) • “the principle of fiscal neutrality precludes treating similar goods and supplies of services, which are thus in competition with each other” • 2 services are similar where they have similar characteristics and meet the same needs from the point of view of consumers (para 44)

17. Limits to fiscal neutrality • Fiscal neutrality is a reflection of the principle of equal treatment (para 61) • Equal treatment must be reconciled with legality: • “a person cannot demand that a certain supply be given the same tax treatment as another supply, where such treatment does not comply with the relevant national legislation” • Hence, harder to achieve parity of tax treatment where the difference arises from administrative practice alone

18. Rank: the relevance of factors Relevant factors Factors usually irrelevant • No general distinction between legal and illegal transactions (para 45) • The EC statutory provision in question • The objective characteristics and consumer needs • Differences between the operators themselves, eg legal form (para 46) • Whether differences between the supplies have a significant influence on the choice of the average consumer • The venue, setting, atmosphere etc (para 47) • The levying of an unharmonised tax (para 48) • Different regulatory regimes (except in exceptional cases) (paras 49-50) • Competition?