LCB and Compensation

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      LCB and Compensation
                              any of the readers of Indirect TaxVoice will   1985 by Douglas Hurd, the then Home Secretary
                              have watched the recent Panorama pro-          (Hansard, columns 691-692). On the subject of
                              gramme on BBC1 which was exclusively           compensation for wrongful conviction, having
                    devoted to the London City Bond affair and its           referred to the fact that persons who have grounds
                    aftermath. The producers considered the feature to       for an action for unlawful arrest or malicious pros-
                    be of such importance that it was switched from the      ecution have a remedy in the civil courts against
                    off-peak viewing time of late Sunday night to a          the person or authority responsible, he added that
                    prominent slot on a Wednesday evening. It concen-        in exceptional circumstances it had been the prac-
                    trated on the events which had taken place at LCB,       tice of successive Home Secretaries to make ex
                    with accounts of the court proceedings thus far, the     gratia payments from public funds to persons who
                    overturning of convictions, reconstruction of the        had been detained in custody as a result of a
                    evidence which had been given by Customs offi-           wrongful conviction. He observed that since 1957 it
                    cers and some account of the various enquiries           had been the practice for the amount of compen-
                    which had taken place subsequently. There were           sation to be fixed on the advice of an independent
   by Gavin         also statements by, or allegedly on behalf of, per-      assessor ‘who, in considering claims, applied prin-
                    sons who had been involved in various capacities.        ciples analogous to those on which claims for dam-
 McFarlane,         And there was a reference to the ongoing enquiry         ages arising from civil wrongs are settled’. Until Mr
  of Temple         by the Metropolitan Police: Operation Gestalt.           Hurd’s statement, his predecessors in office had
                        Of course public attention is concentrated at        not felt bound to accept the assessor’s advice
 Chambers           the present time on the outcome of the police            (although in practice they had always done so). But
      Cardiff       investigation but there is another factor of crucial     Mr Hurd said that he would regard any recommen-
                    importance to the British taxpayer which has not         dation made by the assessor as binding upon him,
                    yet received a great deal of attention. Yet it is one    and his successors in the post have always felt
                    which needs to be focussed on; it is the central         themselves similarly bound. The current assessor
                    issue of compensation for the individuals who were       is Lord Daniel Brennan QC.
                    involved in the LCB prosecutions which were sub-             A few years later, section 133 of the Criminal
                    sequently found by the higher courts to have been        justice Act 1988 reached the statute books. In
                    flawed. A number of those who were convicted             essence, this provides that compensation is
                    have completed prison sentences which had been           payable under that section in the following circum-
                    imposed on them; others have been released from          stances:
                    prison before the completion of their sentences.             * if a conviction is quashed on an appeal which
                    Claims are now being lodged under the schemes            is out of time
                    which apply to such cases.                                   * if a conviction is quashed subsequent to 31
                        One of these has its origins in a Written Answer     March 1997 after the case has been referred to the
                    given to the House of Commons on 29 November             Court of Appeal by the Criminal Cases Review

                                                                                            Contents, Issue 70
                                                                                               Excise - 2
                                                     Gavin McFarlane with the latest on London City Bond

                                                                                          Money Laundering - 4
                                                                              John Warinton tells a cautionary tale

                                                                        News from the Courts - 6
                                   Eamon Mc Nicholas gives us his regular summary of recent cases

                                                                                                   For Students - 8
                                                                                     News of changes to the syllabus

                                                                                Representations - 9
                                     Robert Maas has written to Customs on the Institute’s behalf with
                                                    representations on the option to tax consultation

                2                                                                           Indirect Tax Voice, April 2005
Commission under section 9 of the Criminal              European single market at the start of 1993. But as
Appeal Act 1995                                         a result of recent court proceedings, it is starting to
    * if a conviction is quashed on appeal under        emerge that a policy of non-disclosure was appar-
section 7 of the Terrorism Act 2000                     ently being implemented across a huge swathe of
    * if a free pardon is granted.                      Customs and Excise investigation and prosecution
    In each of these cases, the provision only          activity. A clue was given in the statement of Mr
applies after the emergence of a new or a newly         Healy MP following his announcement of the
discovered fact, and provided the non-disclosure        progress of Operation Gestalt. Other categories of
of this fact was not wholly or partially attributable   Customs investigation, including prosecutions
to the applicant.                                       involving bureaux de change, were being exam-
    Obviously the question of non-disclosure is cru-    ined, it was revealed. But it now appears that areas
cial to the claims which are being made in conse-       of the department’s drugs showcase investigations
quence of the LCB debacle. In both the ex gratia        may also be similarly tainted.
scheme, and the provision under section 133, it is
the Home Secretary who takes the final decision as
to whether the applicant qualifies for payment. The     Drugs case
independent assessor also decides the amount of         At the beginning of April the Court of Appeal
the awards in the section 133 claims. The amount of     quashed the convictions of Jameel Akhtar and four
such awards is not disclosed by the Home                others. Their cases had involved allegations of
Secretary. Interim payments may be made by the          smuggling drugs from Pakistan to the UK using the
assessor before the final amount is determined.         evidence of couriers in Pakistan, who had contact-
They are paid on account, so that they are deduct-      ed British drug liaison officers based in that coun-
ed from the amount of the final award. The inde-        try. The courier tells the unsuspecting supplier in
pendent assessment is made on the basis of writ-        Pakistan that he or she will take the heroin to the
ten submissions which set out the relevant facts.       UK. But the drugs are imported by Customs them-
The principles which are applied are analogous to       selves, who then give the goods back to the couri-
those governing the assessment of damages for           er to deliver to the buyer, who is then arrested.
civil wrongs. In the case of personal pecuniary         Akhtar served seven years of a 13-year sentence
loss, this includes:                                    but claimed he had been set up by political rivals
    * Loss of earnings as a result of the charge or     in Pakistan. Customs now attempt to reduce the
conviction. This head must be supported by best         impact of these cases by a technique of not resist-
available documentary evidence, coupled with            ing the appeals, but the courts are not having this.
details of any state benefits which the claimant has    Lord Justice Hooper has adjourned the case until
received during the relevant period.                    May, when claims that Customs deliberately with-
    * Loss of future earning capacity.                  held evidence will be heard. It appears that the
    * Any legal costs which have been incurred.         Crown is unable to resist the possibility of miscon-
    * Additional expenses incurred, such as travel-     duct by drug liaison officers. A whole series of
ling, in consequence of the detention. This head        appeals using this controlled delivery technique is
includes such expenses as have been incurred by         waiting to follow.
members of the claimant’s immediate family.                 A similar situation is developing in the bureaux
    Non-pecuniary loss may also be taken into           de change cases. Thus in Boyne, Judge Samuels QC
account by the assessor. This may extend to dam-        asked the prosecution to confirm that someone at
age to character or reputation, hardship (including     Customs had decided that the cases could be dis-
mental suffering), injury to feelings and inconve-      tinguished from the LCB cases, and that their pros-
nience.                                                 ecution would be in the public interest. The judge
    In making the assessment, the assessor will         elicited the view from a departmental witness that
take into account any expenses, legal or otherwise,     in terms of failure to disclose, the case was just as
which the claimant incurred in reversing his con-       much a disaster for Customs as was the LCB affair.
viction, or in pressing his claim for compensation.     He insisted on pressing for the names of those
In considering the circumstances leading to the         responsible for taking the decision to prosecute.
wrongful charge or conviction, the assessor will        The answers given will no doubt be subject to the
also have regard to any action, or failure to act, by   ongoing investigation by the Metropolitan Police.
the police or other public authority. The assessor          Lawrence Kormornick of solicitors Guy
may also take into account the extent to which the      Clapham is handling a number of these cases. He
situation may have been contributed to by the           says: ‘The Home Secretary has agreed to make
claimant’s own conduct.                                 payments to a number of the LCB defendants for
    As the LCB series of cases has been presented       wrongful conviction. The question of assessment is
to the public thus far, the impression may have         now under consideration by an independent
been given that the non-disclosure, the revelation      assessor, Lord Brennan QC. He has asked the appli-
of which led to the appeal decisions to convictions,    cants to make full written submissions to him on
was confined to the diversion frauds which took         the issues of pecuniary and non-pecuniary loss.’
place at the warehouse. These were based on the             This chapter of Customs history is not yet
laxity of controls following the introduction of the    closed.

Indirect Tax Voice, April 2005                                                                                    3

                                   The Red Carnation
                              he sole VAT practitioner has to be able to             The company that dealt with the arrivals and
                              cope with all eventualities that clients may       despatches of the bullion in the UK had to be reg-
                              throw at him. Sometimes it is difficult to eval-   istered for VAT and dealt with Intrastat appropri-
                       uate whether the deal being proposed is totally           ately on a monthly basis.
                       bona fide, especially when the client is not known            At some point during the period of these con-
                       to you and he has contacted you from your website.        signments I was asked whether it was necessary
                           Some callers sound perplexed, even in a state         for the use of a shipper for small consignments of
                       of anguish or panic. It is always difficult to assem-     under a hundredweight and whether an individual
                       ble all the facts on a short telephone conversation;      could actually carry the gold on board and be met
                       at that stage it is more like being a doctor and          at Heathrow by a person who would then fly on to
                       delivering a calm and collected voice with com-           Malaga with it. The reasoning behind the enquiry
                       forting words. I always ask my callers during the         was simply on the basis of cost of transportation of
                       conversation to email or write to me, ensuring that       small amounts of gold. My reply to this idea was in
                       they have covered all of the facts and the history of     the affirmative, as long as all the import and export
                       events which has led to the call.                         documentation requirements were complied with.
                           Well this particular event was not ‘new’ so to        My client was quite happy with the requirements
                       speak, in fact the client had been using my ser-          and proceeded to ensure that the person coming
                       vices for some considerable time and my office            from Zurich would deal with the importation in the
                       was being used as a base for several of his UK-res-       UK and the person collecting the gold at Heathrow
                       ident companies; my client being based in                 would deal with the exportation and its onward
                       Gibraltar. Most of the companies owned commer-            transit to Malaga. It was decided that the two per-
                       cial properties within the UK but one was used to         sons would recognise each other by way of a red
                       both purchase and sell gold bullion.                      carnation worn in their lapels - a rather romantic
                           Gold bullion may appear to be a commodity             touch, which would have completed the scene of
                       that one should steer clear of, but provided that         skulduggery to any man on the Clapham Omnibus
                       you have ensured that your client is reputable and        who might have discovered what was contained in
  A cautionary         well-known in the trade, then really there should         the ordinary wheelie black bag that any pensioner
                       be little to worry about other than the usual for-        would use in the supermarket on a Saturday to trip
   tale, told by       malities.                                                 the rest of us up.
  independent              Over the two- or three-year period whilst these           Today you might not get away with simply tak-
                       transactions were being carried out, there being          ing a wheelie bag on board containing a hundred-
VAT consultant         several hundredweight of gold shipped every               weight of bullion and stowing it under the seat in
 John Warinton         month, it was necessary to bring the gold into the        front of you.Well you certainly would not be able to
                       UK to avoid a cash flow problem with regard to VAT        do it on Ryan or Flybe, as every conceivable thing
                       being incurred on arrival in Spain. The gold bul-         is weighed. Moreover, it is just as well that more of
                       lion was purchased in Switzerland and the final           us do not drag bags on board containing the odd
                       purchasers were all Spanish-resident companies            hundredweight of gold, as the plane would never
                       using the gold for the production of jewellery.           get off the ground.
                       Interestingly, the two biggest purchasers of gold
                       for the production of jewellery are Italy and Spain.
                           Due to the consignments being fairly large, a         Audit
                       shipping agent was used to deal with the despatch         Time rolled on as it always does at a surprisingly
                       of the bullion from Zurich and its onward transit,        increased momentum as one gets older. Fred West
                       via Heathrow and on to Malaga. At the time of these       was tried and convicted for mass murder and the
                       shipments a direct delivery from Zurich to Malaga         bodies were found in his basement and garden to
                       would have meant an immediate charge of VAT in            the horror of all who read about it. One morning
                       Spain on arrival, rather than when the gold was           the telephone rang and a Customs Officer asked if
                       actually sold on and used. But bringing it briefly        he could come and audit the transactions conduct-
                       into to the UK and then despatching it on to Malaga       ed by the UK company which had undertaken the
                       meant that no VAT was payable anywhere until it           gold bullion shipments. A date was arranged and I
                       was finally taken out of bond in Malaga. This action      set aside a whole morning for the visit.
                       allowed the gold to be placed in free circulation             It was a dull, damp, blustery, November morn-
                       within the EU. The legislation allowed for the gold       ing and the leaves were swirling around in the gar-
                       to come into bond in the UK and quite simply all          den. The doorbell rang and I opened the door to
                       that had to happen was for the gold to be wheeled         greet not one but two Customs Officers. This to me
                       out of bond, so that it had entered the EU, and then      smelt like some form of a serious enquiry, rather
                       wheeled back again ready for onward transit to            than just a simple audit. Whilst the UK company
                       Spain.                                                    dealing with the consignments of gold bullion had

                   4                                                                            Indirect Tax Voice, April 2005
                                                                                           MONEY LAUNDERING
a high-value turnover, the amount of transactions        steps prior to advising our clients. In fact, I had
did not warrant the attention of two officers. The       another close encounter at the beginning of 2004
audit commenced with coffee and biscuits and             but fortunately, due to my suspicions and my zeal-
maintained a light, if not jovial, rhythm for much of    ousness, I managed to frighten the client off.
the morning whilst we trawled through all the doc-
umentation on a transaction-by-transaction basis.
Finally, it was realised that the export documenta-      Identification
tion relating to two transactions which had been         The situation began with a flurry of emails to me
shipped by two individuals was missing. I immedi-        from my website and the client was using at first a
ately rang my client in Gibraltar to see if it had the   ‘yahoo’ address, which later graduated to ‘hotmail’.
documents in its files. It did not!                          The client was Ukrainian and supposedly living
    One of the officers rested back into the sofa, his   in New Jersey and wished to meet with me straight
eyes firmly fixed in my direction.                       after Christmas. However, Christmas in the Ukraine
    ‘So for these two transactions you have no           overran a little and the meeting did not occur until
record of their export from the UK?’
    His eyes diverted away from me and he sur-
veyed the room and then he turned and looked out            We left the restaurant with me thinking that I was
into the garden.
    ‘So where would you hide two hundredweight              dealing with either a complete joker or a very
of gold in this house?’ he enquired.
    My heart sank. The vision of a car being
                                                            hardened criminal and the only proof was just
crushed by Customs having detected the smug-                about 100% volume
gling of rather more cigarettes than the man on the
Clapham Omnibus might smoke was one thing. But
the thought that Customs might commence tearing          the end of February. I was at first required to advise
the house apart was another. I looked nervously          on the importation from the Ukraine to the UK of
into the garden and stuttered:                           alloy ores and their subsequent processing in the
    ‘Well the garden needs digging!’                     UK and later their onward export. The telephone
                                                         number that I had was that of a USA mobile. Soon
                                                         the requests changed from alloys to the importa-
Denoument                                                tion of both gold and platinum bullion.
The officer glared at me and then there was a sort            I did actually meet him for lunch in Victoria.
of puckering to the lips and a glint appeared in his     Whilst I enjoyed half a bottle of Bordeaux he
eyes.                                                    enjoyed a bottle of whisky. I could see that I was not
    It was plain to me that the person who had           going to finally get through to him as to what proof
transported the two consignments of gold from            of his identity I wanted, nor was I going to obtain
Heathrow to Malaga had simply forgotten to com-          the proof of identity of his company and a board
plete the export documentation before getting on         minute appointing me. We left the restaurant with
the plane. But in Customs’ eyes the gold (all two        me thinking that I was dealing with either a com-
hundredweight of it) was still here in the UK.           plete joker or a very hardened criminal and the
    The glint in the officer’s eyes got brighter and     only proof was just about 100% volume.
he leaned forward and produced some papers                    Time went on and emails arrived asking me to
from his file and waved them in my direction. I          search for premises, etc, and finally a telephone
thought ‘God! Is this a warrant for my arrest?’ A        call asking me how much I had done towards the
thought flashed through my mind with regard to Dr        UK set-up. I said that I had done nothing and was
Johnson’s first dictionary, in which he described        still waiting for proof of identity, etc. He sounded
‘Excise’ as ‘A hateful tax levied upon commodities,      disappointed and said that he would be in London
and adjudged not by the common judges of prop-           in a few days with all the proof that I would need
erty but by wretches hired by those to whom              and that I should meet him at the Intercontinental
excise is paid’.                                         Hotel in Park Lane.
    ‘Don’t be too worried Mr Warinton!’ the officer           I arrived at the appointed time and there was
chortled. ‘These are the papers proving importa-         no sight of the client in the lobby, so I went to the
tion of the two consignments of gold into Malaga,        reception desk. The receptionist had no trace of
we know that it left the UK. The whole investigation     my client on the register, save for one Russian from
into the UK company is part of a chain of events         Moscow - but of course not the same name - albeit
stemming from the Spanish Authorities. The cus-          the date of arrival and planned departure fitted
tomer of the gold in Spain has been convicted of         perfectly. The receptionist tried the room tele-
money laundering and thus we have been                   phone and there was no reply, I tried the ‘client’s’
required to check to see if any one in the supply        mobile and there was no reply either. I waited a
chain is connected, so to speak.’                        further 10 minutes and then left and I never heard
    Since the time when these events occurred,           anything more from him. Just as well I think! I had
everyone has become a lot more conscious of              already considered informing the authorities, the
money laundering and we take the appropriate             only thing was I had no hard and fast evidence.

Indirect Tax Voice, April 2005                                                                                    5

                                                   ECJ to the Fore
                       Staatssecretaris van Financien v Feron                 Court robustly rejected the UK’s attempt to rely on
                       (ECJ, C-170/03, 17th March)                            taxation by administrative practice which was not a
                       Business car for employee use personal property        proper fulfilment of the UK’s obligations under
                       for importation                                        European law. National legislation incompatible
                       An employee had a car made available for his use,      with European law could only be remedied by
                       both business and private, by his employer, The        national provisions of a binding legislative nature.
                       employee was transferred from Austria to The           Accordingly the Commission’s action, that the
                       Netherlands, at which time he exercised an option      Order infringed the Sixth Directive, was well
                       to buy the car. Dutch law uses Regulation 918/83 to    founded.
                       determine whether duty is payable on importation           Comment: The case has serious cost implica-
                       of a car which had been a person’s own property        tions for almost all UK businesses, in particular
                       for six months. Questions arose under the regula-      smaller ones which cannot afford specialist fuel
                       tion as to whether Feron, as an employee who had       card schemes. The problem was that since the leg-
 As part of his        not owned the car for six months, was nonetheless      islation did not ensure that only fuel used for tax-
                       to be regarded as the owner and possessor of the       able transactions could be reclaimed, it was flawed
regular series
                       car. The Court held on ownership that it was com-      and European law holds that effective legislation
         Eamon         patible with the regulation for property used in a     cannot be cured by mere administrative practice.
  Mc Nicholas,         trade or profession to be regarded as personal
                       property, the essential point being that it should     Staatssecretaris van Financien v Arthur
 barrister, of 3       not be imported for commercial reasons.                Anderson & Co (ECJ, C-472/03, 3rd March)
        Temple         Accordingly the car, which for the six months          Back office outsourcing is standard-rated not
                       before importation had been used for both busi-        exempt
  Gardens Tax          ness and private purposes, could be regarded as        The taxpayer is a Dutch business including a sub-
    Chambers,          personal property. As to possession, this had to be    sidiary, Anderson Consulting Management
                       given a Community-wide rather than national            Consultants (‘ACMC’). Universal Leven (‘UL’), a
       presents        meaning and was characterised by control rather        Dutch insurance company, agreed for ACMC to
        another        than ownership. As Feron had exercised genuine         provide the back-office activities for UL’s insurance
   round-up of         control over the car it was his possession.            business. These consisted of such things as the
                                                                              acceptance of applications for insurance, handling
 recent cases.         Commission v United Kingdom                            contracts, issuing policies and managing claims.
     The views         (ECJ, C-33/03, 10th March)                             The issue arose as to whether what ACMC did
                       UK law on employers reclaiming VAT on cost of          came within the scope of services performed by
expressed are          employees business fuel flawed                         an insurance agent under Sixth Directive
   general and         The Commission took action against the UK over         art.13B(a). On a reference the European Court
                       the VAT (Input Tax Person Supplied) Order              noted that ACMC did not have the freedom to
  not intended         1991/2306. In particular the Commission was con-       chose an insurer characteristic of an insurance
     as advice.        cerned that the Order enabled employers to             broker. As to being an insurance agent the court
         (email        reclaim input VAT on the cost of fuel used by          held that ACMC’s activities, although contributing
                       employees. The Court first noted that The Sixth        to the essence of an insurance company, did not
      Eamon@           Directive, art.17 specified the conditions for the     constitute services typical of an insurance agent,
EamonMcNich            right to deduct and did not leave the Member State     such as the finding of prospects and the introduc-
                       any discretion in implementation. In particular        tion of the insured to the insurer. In contrast;         art.17(2)(a) required that input VAT could only be     ACMC’s activities only started when it handled an
telephone 020          deducted for taxable transactions. In contrast the     application. The Court held that what ACMC did
                       Order did not make it a condition for deduction by     was to carry out subcontracted services for UL,
   7583 6264.)         the employer that the fuel claimed by the employ-      such as providing it with human and administrative
                       ee was used for taxable transactions. Indeed, in       resources. Therefore the services rendered by
                       answer to the Court, the UK government acknowl-        ACMC to UL were a form of assistance, for pay-
                       edged that there was not an obligatory link            ment, enabling UL to carry out insurance activities
                       between deduction and taxable operations of the        but without ACMC having a contractual relation-
                       employer. Accordingly, the Order contravened           ship with UL’s clients. ACMC’s activities constituted
                       art.17. The UK submitted that the use of detailed      a division of UL’s activities and not the perfor-
                       mileage records and rates for the cost of fuel per     mance of services by an insurance agent.
                       mile meant that the fuel reimbursed was used for       Consequently ACMC’s back-office activities did
                       the employer’s business. The Court held, however,      not constitute exempt activities of an insurance
                       that UK VAT law was defective as it did not ensure     broker or agent under Art.13B(a).
                       that the VAT on the fuel claimed attached solely to        Comment: What the Court did (as the
                       the employer’s taxable transactions. In addition the   Advocate-General’s Opinion shows) was to draw a

                   6                                                                         Indirect Tax Voice, April 2005
                                                                                NEWS FROM THE COURTS
policy distinction between an insurance company         CPR rule 44, the general rule was that costs fol-
keeping its activities ‘in-house’ and one using out-    lowed the event.
sourced services. An in-house insurance company
bore direct employment costs, with associated tax-      Telewest Communications v Customs
ation, and gained the advantage of VAT exemption.       (CA, 10th February)
In contrast an outsourcing insurance company            Listings publication zero-rated, separate from
escaped the employment costs of providing ser-          taxable cable services
vices itself but its outsourcing contract was a tax-    The taxpayer is a cable television company pro-
able one. In this way the insurance outputs of both     viding services through 28 regional companies.
an in-house or outsourcing insurer are exempt,          Subscribers are also provided with a printed tele-
with each bearing tax, either employment or VAT,        vision guide. Under the Card Protection Plan
on the activities used to produce their outputs.        (ECJ,1999) approach the zero-rated television
                                                        guide would normally be subsumed within the
Optigen, Fulcrum and Bond House Systems v               standard-rated cable services. The taxpayer there-
Customs (AG’s Opinion, C-354-5 and 484/03,              fore set up a scheme to provide the printed guide
16th February)                                          through a wholly-owned subsidiary company that
Advocate General’s Opinion that Customs’                was not a member of the same VAT group. On
approach is illegal                                     appeal the issue arose as to whether Customs
In a blistering opinion the Advocate-General            could seek to unpick the legal arrangements put in
demolishes the legal and logical flaws in the Bond      place and to effectively rejoin the publication ser-
House principle proposed by Customs. Whether            vices to the cable ones to make the publication tax-
the full Court confirms the Advocate-General’s          able. The Court analysed the contractual position
total rejection of Customs’ case is yet to be seen.     at length and held that the arrangement entered
One particular aspect, however, that may weigh          into was perfectly correct and lawful at common
very heavily with the full Court is the Advocate-       law. On the VAT position the Court rejected
General’s coruscating criticism of the UK approach      Customs’ submissions on a number of headings.
to tackling carousel fraud. The Advocate-General        First of all the fact that the cable and publication
stated that the Court should not consent to the UK      services were provided together as a package did
policy of drastically shifting the burden of tackling   not change the VAT analysis. There are limits to the
the problem away from the tax authorities to the        extent to which transactions can be re-charac-
private sector, at the expense of legitimate trade      terised in VAT so as to deny taxpayers the exemp-
and the proper functioning of the whole VAT sys-        tions on which they seek to rely. Secondly, on the
tem.                                                    CPP approach, even though the two transactions
    Comment: a stinging rebuke for what the             were linked there was no authority to treat them as
Advocate-General has held to be the UK’s illegal        a single supply, particularly where, as here, there
approach. The judgment of the full Court is await-      were two suppliers. The Court also rejected a
ed with interest.                                       Customs’ argument on artificiality in which
                                                        Customs sought to substitute their view of the
R (oao Teleos) v Customs (CA, 2nd March)                transactions for what had taken place. The Court
Refusal to grant interim payment of blocked inputs      firmly rejected taxing transactions according to
compatible with European law                            their economic reality, as economic reality may
The taxpayer was assessed to £1.5 million in rela-      have nothing to do with the essential features of
tion to mobile telephones which Customs held had        what the parties have agreed to or the legal struc-
not been shown to their satisfaction to have been       ture of their transaction. The Court went further
exported to Spain and so were standard-rated.           and held that the economic reality of a transaction
Customs recouped part of the money by setting           is antithetical to legal certainty. In answer to
£1.0 million of it against inputs claimed by Teleos.    Customs claiming fairness the Court held that the
The High Court referred the substantive point of        concept of supply in VAT turns on the Sixth
the appeal to the ECJ. Teleos then applied to the       Directive and not on the Court’s assessment of fair-
High Court for an interim payment of half the           ness. The supply was zero-rated, as the contractual
blocked inputs, £0.5 million, under Civil Procedure     documentation showed. Appeal allowed.
Rules (CPR) rule 25. The High Court refused to              Comment: A solid assertion of taxpayers’ right
grant the interim payment and this point was            to structure their affairs according to law and have
appealed. The Court of Appeal held that as              them taxed under EU law, rather than having the
Customs had a discretion to make an interim pay-        legal position artificially picked apart by Customs
ment, which decision was reviewable, UK law pro-        seeking to apply tax where none is due.
vided a mechanism for a taxpayer to obtain relief.
Hence Garage Molenheide (1997) did not apply to         Whitbread v Customs (ChD, 23rd March)
add a European dimension to CPR 25. It was              Airport departure lounge a single location for on-
though unsatisfactory that Customs’ policy and cri-     premises catering
teria used were neither clear nor publicly avail-       Whitbread is the parent company of Costa Ltd,
able. Appeal dismissed. Customs’ cross-appeal on        which operates a number of food outlets at various
costs before the High Court was allowed as, under       types of location. The point under appeal was

Indirect Tax Voice, April 2005                                                                                 7
                       whether cold food, such as sandwiches, sold at          high-performance cars purchased between 1989
                       ‘Costa Coffee’ kiosks and other outlets in the air-     and 1990. The Commissioners refused the claim, as
                       side of departure lounges of airports was zero-         it was more than three years outside the limitation
                       rated under VATA sch.8 grp.1 for food. Questions        period in VAT regs 1995 Reg.29(1A). On appeal the
                       arose as to whether it could be said that there was     issue arose as to whether the taxpayer had a vest-
                       catering on premises, as Costa only held outlet         ed right to reclaim input tax under the Marks and
                       concessions from the airport operators and also         Spencer (ECJ, 2002) principle because its right to
                       whether supplies to all customers were zero-rated.      input tax predated the 1997 amendment which
                       The High Court reviewed the Tribunal’s findings of      introduced Reg.29(1A) without transitional provi-
                       fact on the meaning of catering and premises and        sions. The Court reviewed the case law, in particu-
                       upheld them. In particular the Tribunal finding that    lar Grundig Italiana (ECJ 2002), on transitional pro-
                       the whole of the airside departure lounge consti-       visions. The Court held that even where, as here
                       tuted premises for catering, and not just seating       with Reg.29(1A), there were no transitional provi-
                       near the Costa outlets, was valid because the gen-      sions, the reasoning in Grundig applied. The Court
                       eral public did not have access to the departure        held therefore that even where, as here, there were
                       lounge. As the Court noted, had the kiosks and          accrued rights which might otherwise require a
                       other outlets been staffed by Airport Authority         national court to disapply subsequent time limits,
                       personnel there would be no argument that it was        this was based upon the taxpayer bringing his
                       catering. Merely because the same facilities were       claim within a reasonable time. If the taxpayer let
                       offered by Costa, ought not to make any difference      too much time go by the principles of ‘finality’ or
                       to the tax treatment. In contrast, sales made to air-   ‘legal certainty’ required the court to refuse to dis-
                       port staff or passengers eating on the aeroplane        play the limitation provisions. In this case the Court
                       would be zero-rated, as the food would not be con-      held that since the taxpayer had had from 1990 to
                       sumed in the departure lounge which constituted         make his claim, which he had only made some
                       the premises. Evidence on this last point had not       three years, five months after the introduction of
                       been put before the Tribunal and so the Court did       the time limit in Reg.29(1A), his claim was out of
                       not specifically deal with it. Appeal dismissed.        time. Appeal dismissed.
                                                                                    Comment: Although the taxpayer’s right pre-
                       Michael Fleming t/a Bodycraft v Customs                 dated the time limit in Reg.29(1A), so that strictly
                       (ChD, 25th February)                                    speaking under the old law no time limit applied at
                       Vested right to input tax lost due to very late claim   all, the case highlights the need not to let input tax,
                       In 2000 the taxpayer claimed input tax on three         or other claims, go stale.

            Associate Examination Syllabus
                                                             Changes to the Syllabus with effect from 2005

     he Institute’s Education Committee is continually            Section 1: now includes Group Registration (3)
     reviewing the Associate Examination Syllabus in order        Section 2: now includes Transfers of Business (3)
     to ensure that it continues to be up to date and relevant.   Section 6: now includes Options to tax land & Buildings (3)
The Syllabus can be found on the Institute’s website              and Bad Debt Relief (3)
( and the following is a note of the
changes which have been made.                                     PAPER III - BOTH ROUTES - OTHER INDIRECT TAXES
                                                                  New final section on Business Rates
Section 1: Trusts now become Trusts (as trading entities)         PAPER IV - NOW ENTITLED STAMP TAXES, DIRECT TAXES
New Section 5 entitled Negligence and covers Professional         AND INTERACTION OF ALL TAXES
Practice (all the following sections have been renumbered
accordingly)                                                      STAMP TAXES
Section 6: now includes a new heading Legislation which           Part I
covers primary, secondary and tertiary                            section 3 Essential Features of Stamp Duty - now deleted
There is also a further new heading Common Law                    Part III
Section 7: EC Law now covers: The Treaties, Structure &           Section 1 - now includes Leases/leasehold interests
Membership of the EC, The role of the ECJ, Parliament,
Council and Commission, Techniques & interpretation of            New Title - DIRECT TAXES AND INTERACTION OF ALL
EC Law, Direct Application of EC Law                              TAXES
                                                                  New Part V - International Tax which covers Transfer
PAPER II VAT ROUTE and VAT part of PAPER III CUSTOMS              Pricing and Withholding Agreements
ROUTE (numbers in brackets applies to those sitting the           Renumbered Part VI - new sub heading 7 Tax
Customs Route)                                                    Consequences of investigations

                   8                                                                           Indirect Tax Voice, April 2005

The Future of
the Option to Tax
     he paragraph numbers in these representa-           possible that some landlords may have already
     tions the reflect the numbered questions in         entered into negotiations with exempt tenants to
     Customs’ original document ‘VAT: the future         revoke the option to tax when it becomes available
of the option to tax’ (see          to them in 2009 in return for a higher than market
uk/channelsPortalWebApp/downloadFile?content             rent. It would be unreasonable to interfere with
ID=HMCE_PROD_011543).                                    such commercial arrangements entered into on the
                                                         basis of current legislation.

Demands for revocation
1.We agree that revocation of the option to tax after    Information to be provided
20 years will probably only be considered where a        4. We do not have strong views about the informa-
new incoming major tenant is exempt or partially         tion requirements. It would seem sensible for the
exempt and where revoking the option might               requirements for revocation to mirror those for the
result in achieving a better than market rent. The       exercise of the option to tax. As with the option, we
decision would depend on:                                do not think that a specific form should need to be
    * what rent could be achieved over and above         completed but think it would be sensible for
market rent                                              Customs to produce a form similar to VAT 1614:
    * whether the property is subject to continuing      ‘Option to tax land and property’.We think that the
adjustments under the Capital Goods Scheme               following information should probably be required
    * whether extensive capital works are pro-           for Customs to agree to a revocation:
posed in the near future                                     * there should be a clear description of the
    * whether the government imposes a tax               property together with a precise plan, address and
charge at the time of the revocation; clearly revo-      land registry title
cation, even in the above circumstances, would be            * reason for wanting to revoke
                                                                                                                     Robert Maas
unlikely if the revocation itself were to trigger a          * the date that revocation is to take effect            made this
significant tax charge.                                      * details of any Capital Goods Scheme items
    2. We agree that the level of demand for revo-       that are still in the adjustment period.
                                                                                                                     response to
cation will probably be low. It will only advantage          We are concerned at the suggestion that                 Customs on
tenants who are exempt or partially exempt. In           Customs will need at least a month to deal with
                                                                                                                     behalf of the
practice some landlords opt in their properties as       requests for permission to revoke. Bearing in mind
a matter of course and many others do so when            that it is envisaged that there will be few such            Institute
they expect to incur significant expenditure on          requests, we find it difficult to understand why it
refurbishment. This suggests that the possibility        should take so long to consider an individual
that the range of potential tenants or purchasers        request.
might be less for an opted building than otherwise
is not currently regarded as a significant problem.
When the option to tax was introduced there was a        Automatic consent to revocation
widespread fear that it might result in a two-tier       5. We welcome the proposal for automatic consent
property market but that has not happened.               albeit in very limited circumstances. On the
    On the other hand the beneficiaries of a revo-       assumption that revocation would not itself trigger
cation could well include charities, hospitals and       a tax charge we are unclear what potential risk to
educational establishments which do not necessar-        the revenue is likely, except in circumstances
ily want to rent ‘high tech’ space but which in the      where the building, or some of the expenditure on
past have sometimes been unable to rent space in         it, is still within the Capital Goods Scheme. We
inner city areas due to the VAT cost on rents. If the    accordingly feel that to obviate unnecessary com-
cost to a landlord of revocation is low the ability to   pliance costs, permission should be required only
revoke could well result in more space being made        in such circumstances.
available to such institutions after 2009.                    We agree that even where automatic consent
    3. We would like to see as much flexibility with     applies there should be an obligation to notify
regard to the option as possible.We do not believe       Customs of the revocation.
that reliefs should be removed merely because it is           We are not convinced that the assumption that
hard to identify several years in advance what the       there is likely to be a low demand for revocation
take-up of such a relief is likely to be. Indeed it is   makes the administrative burden of the need to

Indirect Tax Voice, April 2005                                                                                   9
            obtain consent less onerous. It will still create        paper envisages by the word ‘accrued’. For exam-
            delay and extra costs for the taxpayers concerned.       ple, suppose rent is payable quarterly in arrears
                                                                     and the option is revoked on 1 November. We do
                                                                     not think that the rent for the period 1 November to
            Cooling-off period                                       25 December should attract VAT. The normal tax
            6. We agree that it would be sensible to have a          point rules should apply.
            cooling-off period with regard to revocations. We            On the other hand if the rent due on 29
            suggest that, in addition to the proviso that no new     September is unpaid at 1 November we can see
            grants have been made of the property within the         merit in its being taxable if it is received after 1
            period and that any necessary adjustments to out-        November. A deemed tax point on revocation (1
            put tax and input tax can be made, there should          November in this example) would, however, result
            also be a requirement that no premiums have been         in a tax charge on unpaid past rents that might
            received by the landlord in respect of any existing      never be received. We do not think that reason-
            or new letting of the property.                          able, particularly bearing in mind that if cash
                 7. We think that a revocation should be reinstat-   accounting did not apply tax would be remitted in
            ed if it is subsequently discovered that a lease pro-    such circumstances by the operation of bad debt
            vision that prohibited the landlord from revoking        relief.
            the option was overlooked. We think that revoca-             On balance we feel that the government should
            tion should be permitted outside the three-month         accept the loss of tax. Where a business moves
            period in such circumstances but that a tax adjust-      from cash accounting to normal accounting it has
            ment should be made as a condition of such revo-         to pay tax on supplies made in the cash era but
            cation to claw back any benefit obtained by the          paid for subsequently. It seems to us that revoca-
            taxpayer during the period since the revocation.         tion is the reverse of this situation. Accordingly we
                 8. We agree that, to be consistent, where the re-   do not see why the same procedure should not
            option is made outside the cooling-off period a          apply in reverse.
            new 20-year period should commence. Re-option
            is likely only where the taxpayer incurs additional
            capital expenditure or grants a new lease to a ten-      Avoidance
            ant who is carrying out a business which is fully        11. We believe that the proposals with regard to
            taxable and who would be disadvantaged by hav-           avoidance are reasonable.
            ing to pay irrecoverable VAT on service charges,
            which are the main current triggers for exercising
            the option. Exceptionally where the revocation           Early Revocation
            arises from the circumstance envisaged at answer         12. We feel that early revocation should also be
            7 above we do not think that a new 20-year period        allowed, preferably on an automatic basis, where
            should commence but that the taxpayer should be          an election was made on a property prior to a pro-
            able to reconsider revocation at the expiry of the       posed purchase, that proposal fell through and a
            lease concerned.                                         new proposal was subsequently made to buy the
                                                                     same property. In such circumstances the new pro-
                                                                     posal, which might be several years after the first,
            Position of tenants                                      could well envisage a completely different devel-
            9. We think that there should be a legal obligation      opment and it is unfair that the purchaser is stuck
            on a landlord to inform tenants of the revocation. A     with his earlier protective option that was made in
            landlord might forget to tell an agent of the revo-      relation to an abortive transaction.
            cation with the result that output tax might be              13. In addition to the suggestion at answer 12
            charged in error on subsequent rents. The tenant         above and the examples outlined in the discussion
            should be entitled to the information that he needs      document, it would be helpful to business if revo-
            to check his rent demand. The rent paid by remain-       cation were allowed:
            ing taxable tenants is only likely to be increased           * on demolition
            on a rent review (and then only if the wording of            * on the grant of a lease of the whole building
            the lease is silent about VAT) or on the grant of a      and
            new lease. However, it would clearly be unreason-            * on the assignment of a lease of the whole
            able for a landlord to be able to renegotiate a lease    building where the assignor is fully taxable and the
            between revocation and the tenant receiving his          assignee is exempt.
            next VAT-free rent demand, knowing that he has               14. The proposal contained in paragraph 5.4
            revoked the option but with the tenant being igno-       may be unfair on the taxpayer if all of the input tax
            rant of that fact.                                       has been used in making taxable supplies. It would
                                                                     be fairer to limit the charge to the amount neces-
                                                                     sary to claw back any excess of input tax over out-
            Rental payments                                          put tax during the period for which the option took
            10.We acknowledge that there could be a problem          effect.
            but we are sceptical whether the proposed solu-              15. An alternative might be to require at the
            tion is fair. We are not clear what the discussion       time of revocation payment only of the tax that

       10                                                                           Indirect Tax Voice, April 2005
would be due under the Capital Goods Scheme if            right to revoke it on the demolition of the existing
the building were sold at that time.                      building.
                                                              23. Demolition of a building should automati-
                                                          cally revoke the option on the underlying land as
Global options                                            well, perhaps with a right to affirm the option in
16. We doubt that there is any demand for global          relation to the land if the owner wants it to remain          The Institute’s
options.                                                  opted but does not want to start a new 20-year                address is
    17. We have no concerns about the proposal to         revocation period running.
cap existing global options.                                  24. The developer should be able to revoke the            Suite G1,
    18.We do not think it reasonable for Customs to       option in respect of the land prior to the develop-           The Stables,
now require details of properties held at 1 April         ment taking place.
1989 which are including in existing global
                                                                                                                        Station Road
options, for the reasons given at 6.1. If businesses                                                                    West, Oxted,
did not have information available at April 1989          Extensions and linked buildings                               Surrey
they are equally unlikely to have it now.We suggest       25. We agree that if the option to tax spreads to an
that where a business seeks to revoke the option in       extension or a linked building the 20-year period             RH8 9EE
relation to a building included in a global option it     should run from the date of the original option. If
should be required to give details of the acquisi-        the Capital Goods Scheme applies to the extension
tion if it was after 1 April 1989 or a certificate that   or to the linked building, input tax relating to any          The Institute’s
the building was owned at 1 April 1989 if that was        remaining intervals at the time the revocation is             telephone
the case.                                                 made should continue to be repayable.
                                                              26. A problem with the existing rules can arise
                                                                                                                        number is
                                                          where a landlord owns two adjacent buildings, one             01883 730658
Option to tax and VAT groups                              of which is subject to an option and the other is not,
19. None of our members has drawn our attention           and the ground floor tenant (such as a DIY store)
to the problem envisaged in the discussion paper.         wishes to extend his premises by knocking                     The Institute’s
    20. An easier solution would be to require the        through into the ground floor of the non opted                website
transferor to notify Customs of the transfer and of       property. In such circumstances it is unfair that
new owner’s identity. We envisage difficulties if an      such action causes the option to flow through so as           address is
option to tax has to be made by someone who is            to affect other tenants occupying other parts of the
not a registered person and therefore does not            non-opted property.
have a registration number. Businesses often trans-
fer assets within a group for good commercial rea-
sons. It is important that any new requirement does       Suppliers of property interests                               The views
not inhibit such transfers. We would be particular-       27. Most owners would consider revoking the
ly concerned if the option to tax had to be made          option where the existing or a proposed new grant             expressed in
before the transfer took place. We envisage prob-         is to a tenant who is exempt or partially exempt, or          this
lems in practice even if the option were to take          where there is an assignment of an existing interest
effect only from the date of notification. It is impor-   by an assignor who is fully taxable to an assignee            newsletter
tant that it continues to have effect throughout. If      who is exempt. Future negotiations could provide              are not
the need for a new option is to deal with problems        for the receipt of a higher than ‘market rent’ in
on disposals, it would be unreasonable if it were to      return for exercising the right to revoke the option.         necessarily
have a side effect of creating disallowable input tax     Any outstanding Capital Goods Scheme intervals                those of the
whilst the property remains in the VAT group.             should have to be taken into account.
                                                                                                                        Institute and
                                                                                                                        no legal
Option to tax - other issues                              Tenants                                                       responsibility
21. We are happy with the existing position, which        36. We do not have concerns about the power of
seems to us to give maximum flexibility. We think         our own landlord to be able to revoke its option to           can be
the separate treatment of land and buildings par-         tax. Our lease expires before 2009.When we enter              accepted by
ticularly advantageous to business in as much that        into a new lease we will consider putting in a pro-
where bare land has been purchased on which an            tective clause similar to those that were contained           the Institute
option has been exercised any future proposed             in leases granted towards the end of the 1980s and            for opinions,
building can remain exempt from VAT, albeit that          early 1990s where tenants did not want their land-
tax would at some stage be payable in respect of          lord to exercise an option to tax. We are of course
                                                                                                                        advice or
the land.                                                 conversant with the VAT rules. We are sceptical               recommen-
    22. A disadvantage of the current policy is that      whether most tenants will be aware of the need to             dations
the ‘developers concession’ is not widely known. It       consider putting a clause in their lease to prevent
is also very easy for developers to forget to re-opt      a landlord from revoking the option to tax if to do           expressed
when demolishing an existing structure and rede-          so would result in the tenant paying hidden VAT on
veloping the site. It might be preferable in such         service charge costs.
circumstances for the option to automatically                 37.We feel that our landlord ought to notify us if
apply to the proposed new building but with a             it revokes its option.

Indirect Tax Voice, April 2005                                                                                     11

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