United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2005] UKVAT V19140

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Rightacres v Customs & Excise [2005] UKVAT V19140 (29 June 2005)

19140

Value added tax – input tax – partial exemption – whether share dealing incidental to main business of appellant company - no

LONDON TRIBUNAL CENTRE

RIGHTACRES LTD Appellant

- and -

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Dr David Williams (Chairman)

Angela West FCA (Member)

Sitting in public in Cardiff on 21 April 2005

The Appellant did not appear and was not represented

Mr Owain Thomas of counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

As the Appellant was neither present nor represented at the hearing, Mr Thomas applied for the case to proceed under Rule 26 of the Value Added Tax Tribunal Rules. The tribunal noted from the papers that the previous representatives of the Appellant had been replaced by new representatives in February 2005, and that the papers giving notice of the hearing on 20 April 2005, which had been received by the previous representatives, had been passed to the new representatives. The clerk had contacted the new representatives and the appellants on the instructions of the chairman. The clerk had been informed that the individual representing the Appellant was not available but that further enquiries would be made. No other communication had been received by the tribunal or the Cardiff hearing centre from the Appellant or representative, and Mr Thomas confirmed that he was instructed that the Respondents had had no relevant communications. The tribunal, noting that it had been acknowledged for the Appellant that proper notice had been received, accepted Mr Thomas' application and heard the case in full. It agreed to accept that application rather than strike the appeal out for non-compliance. It noted, in so doing, that the Appellant had a right to ask for its decision to be set aside as the hearing took place in its absence.

The Respondents provided the tribunal with a full set of relevant papers, including the Appellant's annual report and financial statements for 1999 and 2000. Elin Thomas, an Officer of Revenue and Customs and the officer who raised the assessment under appeal, gave evidence on oath. Mr Thomas also took the tribunal to the papers relating to the appeal and, at the request of the chairman, raised issues that might assist the Appellant as well as putting the Respondents' case.

The central issue under appeal is whether the Appellant shows any reason why the assessment made for the Respondents on 18 July 200 in the sum of £17,262 plus interest of £1630.82 should be set aside or revised. That assessment was made on the basis that the Appellant had not properly applied the partial exemption rules in its returns.

Mr Thomas confirmed to the tribunal that there was no issue of quantum outstanding between the parties. Further, a special method for dealing with partial exemption had been agreed between the parties with effect from 10 July 2002. However, that agreement was not retrospective. The issue for the tribunal was whether the Appellant was or was not wrong in failing to apply the standard method for calculating value added tax in respect of partial exemption before the special method was agreed.

Behind that issue was a single question requiring decision, namely whether the share trading conducted by the Appellant in the year ended 31 August 2000 was or was not "incidental" to the main activities of the Appellant within the meaning of 101(3)(b) of the Value Added Tax Regulations 1995.

Regulation 103(3) provides, so far as relevant:

In calculating the proportion under paragraph (2)(d) above, there shall be excluded –

…

(b) any sum receivable by the taxable person in respect of any of the following descriptions of supplies made by him, where such supplies are incidental to one or more of his business activities …

It is common ground that the supplies in question are within this rule if they are "incidental to one or more of his business activities".

Mr Thomas contended that whether or not a supply was incidental to the main business of a taxable person for the purposes of partial exemption was essentially a matter of fact, provided that both the supply said to be incidental and the main business were supplies within the scope of value added tax. It was not disputed for these purposes that any dividends received by the Appellant were supplies otherwise than for consideration and not within the scope of the tax. He drew attention to the reliance of the tribunal in C H Beazer (Holdings) Plc v Commissioners of Customs and Excise (1987) VAT Decision 2447, on the "ordinary, everyday meaning" of incidental.

He also submitted that the tribunal, when applying regulation 101, should follow the decision of the European Court of Justice in Empresa de Desenvolvimento Mineiro SGPS SA (EDM) v Fazenda Public, Case C-77/01, of 29 April 2004. The case concerned the term "incidental" in Article 19 of the European Council Sixth VAT Directive (Council Directive 77/388/EEC). The tribunal accepted his argument that this was directly relevant to the consideration of the same term in Regulation 101 as both concerned the issue of partial exemption, although Regulation 101 applied not because of Article 19 but because of a special rule operating by derogation from that Article. In EDM, the Court ruled that:

"activities that consist in the simple sale of shares and other negotiable securities … do not constitute economic activities within the meaning of Article 4(2) of the Sixth Directive and, therefore, they do not come within the scope of that directive." (Paragraph 62).

It follows that if the only activities involving shares are receipts of dividends and sales, then the activities are outside the scope of the tax. That being so, they are not relevant to a partial exemption calculation. The converse is that to be relevant, the activities involving the shares must be more than merely "simple sales". This is clearly relevant to the assessment of whether the share activities of the Appellant are "incidental" to its other activities.

The Court in EDM also commented directly on the meaning of "incidental" in Article 19. The Court identified the purpose of the rule as follows:

"The purpose of excluding certain incidental transactions from the denominator of the fraction used to calculate the deductible proportion, in accordance with the second sentence of Article 19(2),is to neutralise the negative effects for the taxable person of that consequence inherent in the said calculation in order to avoid such transactions distorting that calculation and to thus meet the objectivity of neutrality guaranteed by the common system of VAT." (Paragraph 75).

The Court concluded:

"It follows from the foregoing that the annual granting of loans by a holding company to companies in which it has a shareholding and placements in bank deposits in securities such as Treasury notes or certificates of deposit, in so far as these transactions involve only very limited use of assets or services subject to VAT, are to be regarded as incidental transactions within the meaning of the second sentence of Article 19(2) of the Sixth Directive. In that regard, although the scale of the income generated by financial transactions within the scope of the Sixth Directive may be an indication that those transactions should not be regarded as incidental within the meaning of that provision, the fact that income greater than that produced by the activity stated by the undertaking concerned to be its main activity is generated by such transactions does not suffice to preclude their classification as "incidental transactions."