Month: October 2022

Hearings in the Supreme Court are now shown live on the Court’s website.

On Tuesday 1st November the Court will hear the case of Brake and another v Chedington Court Estate Ltd on appeal from [2020] EWCA Civ 1491. The hearing will be at 10:30 in Courtroom One, and will consider whether a bankrupt has standing under section 303(1) of the Insolvency Act 1986 to challenge transactions entered by their trustee in bankruptcy in situations where the relief sought would have no impact on their position within the bankruptcy.

On Wednesday 2nd November, the Supreme Court will hand-down two judgments:

i) The Soldiers, Sailors, Airmen and Families Association – Forces Help and another v Allgemeines Krankenhaus Viersen GmbH – on appeal from [2020] EWCA Civ 926

The appeal concerns the interpretation of the Civil Liability (Contribution) Act 1978 (the 1978 Act). The single issue is whether the 1978 Act has extra-territorial effect. If it does then a contribution claim can be brought under the 1978 Act even though the contribution claim is governed by a foreign law rather than English law. Allgemeines Krankenhaus Viersen GmbH (AKV) argues that it does not have extra-territorial effect.

ii) Hillside Parks Ltd v Snowdonia National Park Authority– on appeal from [2020] EWCA Civ 1440

The Judgment will consider where there are successive planning permissions relating to the same site, and the later permissions are for changes to one part of a wider development approved in the original planning permission, is the effect of implementing the later permission(s) that the original permission is completely unimplementable? Or can the original permission still be implemented in relation to areas unaffected by the later permission(s)?

On Thursday 3rd November the Court will hear Barton and others v Morris and another in place of Gwyn–Jones, on appeal from [2019] EWCA Civ 1999. The hearing will be at 10:30 in Courtroom Two, and will consider where a contract provides for an introduction fee to be payable upon a property being sold for a certain amount, and the property is sold for less than that conditional amount, is a restitutionary claim by the introducer for a reasonable remuneration excluded by virtue of the contract?

 

The following Supreme Court judgments remain outstanding: (As of 02/11/22)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
Fearn and others v Board of Trustees of the Tate Gallery heard 7th December 2021
Stanford International Bank Ltd (in liquidation) v HSBC Bank PLC, heard 19th January 2022
Commissioners for Her Majesty’s Revenue and Customs v NHS Lothian Health Board, heard 8th June 2022
Canada Square Operations Ltd v Potter, heard 14th June 2022
R v Andrewes, heard 21st June 2022
DB Symmetry Ltd and another v Swindon Borough Council, heard 12th July 2022.
Reference by the Attorney General for Northern Ireland – Abortion Services (Safe Access Zones) (Northern Ireland) Bill, heard 19th July 2022
R (on the application of VIP Communications Ltd (In Liquidation)) v Secretary of State for the Home Department, heard 4th October 2022
of DCM (Optical Holdings) v Commissioners for His Majesty’s Revenue and Customs, heard 12th October 2022
McCue v Glasgow City Council, heard 18th October 2022
Unger and another (in substitution for Hasan) v Ul-Hasan (deceased) and another, heard 20th October 2022
In the matter of an application by Rosaleen Dalton for Judicial Review (Northern Ireland), heard 26th October 2022.
Brake and another v Chedington Court Estate Ltd, heard 1st November 2022
Barton and others v Morris and another in place of Gwyn–Jones, heard 3rd November 2022.

In this post, Jack Prytherch, Of Counsel in the Tax team at CMS, previews the case of News Corp UK & Ireland Limited v Commissioners for His Majesty’s Revenue and Customs, which is scheduled to be heard on 22 and 23 November 2022.

The Supreme Court will consider whether the Court of Appeal erred in finding that supplies by News Corp UK & Ireland Limited (“News UK”) of digital editions of The Times, The Sunday Times and The Sun were not supplies of “newspapers” such that they could not be zero-rated for VAT purposes.

Background

It is a general principle under EU law that all supplies of goods and services should be subject to VAT. Derogations from that general principle (e.g., by way of exemptions, reduced rates and zero-rating) are strictly limited.

In the UK, supplies of “newspapers” are zero-rated pursuant to section 30 and Item 2, Group 3 of Schedule 8 to the Value Added Tax Act 1994 (“VATA”). Accordingly, a person making a supply of “newspapers” for these purposes would not have to account for output tax on such supply but could still recover associated amounts of input tax.

Prior to Brexit, the UK’s zero-rating for “newspapers” (as a derogation from the general principle referred to above) relied on successive EU “standstill” provisions designed to preserve the treatment of certain supplies that had existed prior to the UK joining the common system of VAT (including the tax-free treatment of newspapers in place under the UK’s previous Purchase Tax regime). Most recently, Council Directive 2006/112/EC, art 110 provided that member states operating zero-rating as at 1 January 1991 under domestic law were permitted to continue to do so, provided that such zero-rating had been adopted for clearly defined social reasons and for the benefit of the final consumer.

Taking advantage of a relaxation in EU rules, UK legislation was amended from 1 May 2020 to make clear that electronic supplies of certain publications, including digital editions of newspapers, would be zero-rated. However, prior to that date, HMRC’s position had been that the term “newspapers” under Item 2, Group 3 of Schedule 8 VATA should be interpreted as applying to printed newspapers only (i.e., as a supply of goods) – whereas supplies of digital newspapers (as supplies of services) were regarded by HMRC as standard rated for VAT purposes.

News UK is the representative member of the VAT group that publishes The Times, The Sunday Times and The Sun (including The Sun on Sunday). In a challenge to HMRC’s historical position as described above, News UK submitted VAT claims for the period from September 2010 to December 2016 on the basis that supplies of digital editions of these newspapers should be zero-rated for VAT purposes.

One of News UK’s main arguments was that, under the “always speaking” principle of statutory construction, the term “newspaper” for these purposes should be interpreted in a way that has kept pace with the modern world. News UK also argued that the principle of fiscal neutrality prevented VAT from being imposed differently so as to distort competition between supplies which are objectively similar from the viewpoint of consumers (i.e., printed and digital editions of the same newspaper).

Decision of the First-tier Tribunal (“FTT”)

Having conducted a detailed evidential review, the FTT found the content of the printed and digital editions of News UK’s newspapers was essentially the same or very similar. The FTT also accepted that both the printed and digital editions of these newspapers served the same general purposes of promoting literacy and informing public debate.

Notwithstanding these findings of fact, the FTT concluded that Item 2, Group 3 of Schedule 8 VATA should be interpreted as applying only to printed newspapers. Zero-rating is a derogation from the general principle that all supplies of goods and services should be subject to VAT (and subject to standstill provisions) and therefore must be strictly interpreted. On that basis, the FTT held that neither the “always speaking” principle of statutory construction nor the principle of fiscal neutrality could extend the scope of this provision beyond the supply of goods (i.e., printed newspapers) to cover the supply of services (i.e., digital newspapers).

Decision of the Upper Tribunal (“UT”)

The UT allowed News UK’s appeal and concluded that the digital editions of the relevant newspapers were “newspapers” for relevant purposes.

According to the UT, although the various Items in Group 3 of Schedule 8 VATA were all physical articles at the time of enactment, there was nothing in the legislation to suggest that Parliament had intended to exclude non-physical articles. On that basis, the fact that digital newspapers constituted supplies of services was not in itself sufficient to exclude them from Item 2, Group 3.

The UT also held that the “always speaking” principle is not excluded by the fact that zero-rating is designed to be restrictive – indeed, a digital newspaper was precisely the sort of technological innovation that the “always speaking” principle was intended to address. In light of that decision, it was not necessary for the UT to address the fiscal neutrality argument.

Decision of the Court of Appeal

The Court of Appeal reversed the UT’s decision, concluding that the proper construction and scope of Item 2, Group 3 of Schedule 8 VATA extended only to supplies of physical articles.

Examining the language used by Parliament, the Court of Appeal noted that Group 3 of Schedule 8 VATA is comprised of similar Items (e.g., newspapers, books, booklets, maps, etc.) and held that the words used within each Item and in the notes to that provision must be read and interpreted together. The reference to specific articles and the circumstances of the enactment of Group 3 of Schedule 8 VATA indicated a narrow Parliamentary intention that was consistent with zero-rating being a derogation from the general principle that all supplies of goods and services should be subject to VAT. Although the printed and digital editions of News UK’s newspapers may serve a common social policy, the wording adopted by Parliament displayed a narrower purpose. The Court of Appeal noted, for example, that the same social policy would be fulfilled by a “rolling news” services, which it said clearly should not fall within the term “newspaper”. The purposive approach adopted by the Court of Appeal and the “always speaking” principle could not be elevated above the need for a strict approach to be taken as regards the interpretation of zero-rating provisions.

In light of its conclusions, the Court of Appeal did not need to consider the wider arguments around fiscal neutrality. However, it described News UK’s arguments on this point as problematic for several reasons, including that the CJEU had previously ruled that the infringement of fiscal neutrality may be envisaged only as between “competing traders”. The Court of Appeal held that, although consumers may choose between the printed and digital formats supplied by News UK, these formats were not in competition with each other in the same way as they might be with the printed or digital products supplied by rival publishers.

Comment

As referenced above, Group 3 of Schedule 8 VATA was amended with effect from 1 May 2020 to make clear that, amongst other things, Item 2 can include electronic supplies of newspapers. As such, the importance of News UK’s appeal is largely historical. As noted in the Court of Appeal’s decision, however, the principles of this case may also apply to other Items within Group 3 of Schedule 8 VATA and elsewhere – in particular to “books”, “journals” and “periodicals”.

In this post, Alex Tubbs, an Associate in the CMS Disputes team, comments on the UK Supreme Court’s decision in BTI 2014 LLC v Sequana SA & Ors [2022] UKSC 25, handed down by the Supreme Court on 5 October 2022. This case concerns the issue of whether the trigger for the directors’ duty to consider creditors is merely a real risk of, as opposed to a probability of or close proximity to, insolvency.

Background

On 18 May 2009, the directors of a UK limited company, Arjo Wiggins Appleton Limited (“AWA”) resolved to distribute a dividend of €135m (“the Dividend”) to its parent company and sole shareholder, Sequana SA (“Sequana”). At the time, AWA’s assets consisted of an investment contract, insurance policies and a debt owed to the company by Sequana. These assets far exceeded the provision made for the company’s contingent liabilities on its balance sheet, and the company was consequently deemed solvent on both a cash flow and balance sheet basis at the date of distribution of the Dividend. Pursuant to their obligations under the Companies Act 2006, s 643(1), the directors signed a solvency statement confirming the same. It was common ground that the Dividend also complied with the rules regarding maintenance of capital.

AWA’s sole liability was its long-term contingent liabilities relating to environmental clean-up costs of the Fox River in Wisconsin (“the Liabilities”). However, the Liabilities were of an uncertain amount, and this gave rise to a ‘real risk’ that AWA might become insolvent at an uncertain future date. Several years following distribution of the Dividend, it became apparent that the Liabilities had a significantly higher value than the directors of AWA had estimated. AWA subsequently entered into administration in October 2018.

BTI 2014 LLC (“BTI”) was the assignee of AWA’s claims. Following AWA’s insolvency, BTI commenced proceedings in which it sought to recover the value of the Dividend on the basis that (i) the distribution constituted an unlawful reduction of capital; and (ii) the decision to pay the Dividends was a breach of the directors’ fiduciary duties to consider the creditors’ interests.

Additionally, AWA’s principal creditor sought to have the Dividend set aside as a transaction at an undervalue which was intended to defraud creditors, contrary to the Insolvency Act 1986, s 423.

Decisions of the lower courts

The High Court dismissed BTI’s claim.

The High Court determined that there were circumstances in which company directors were bound to consider the interests of creditors in addition to those of its members (“the Creditor Duty”). However, Rose J explained that the Creditor Duty would not apply in situations where there is a mere ‘real risk’ that a company will have insufficient assets to meet a liability, which included temporary circumstances where a company was balance-sheet insolvent. This would place an unfair burden on directors, who would be incorrectly forced to prioritise creditors’ interests over shareholders’ interests over a prolonged period of business activity. The High Court was particularly concerned about such a duty causing “significant inroad to the normal application of directors’ duties”. Instead, the High Court held that the Creditor Duty should only become engaged in circumstances “where the company is insolvent, or where it is more likely than not to become insolvent”.

The High Court also determined that since AWA was solvent on a balance sheet basis at the date of distribution of the Dividend (“the Date of Distribution”), there was no justification for holding that the Dividend constituted an unlawful reduction of capital. Furthermore, the High Court determined that AWA was not insolvent or likely to become insolvent at the Date of Distribution. The Creditor Duty was therefore held not to have been engaged when the Dividend was paid. It was consequently irrelevant that, in distributing the Dividend, the directors of AWA had not considered the creditors’ interests.

BTI sought to appeal the High Court’s findings on the basis that Rose J had misinterpreted the circumstances in which the Creditor Duty would engage.

Rose J did, however, find in favour of AWA’s principal creditor on its claim that the Dividend should be set aside on the grounds that there was a transaction at an undervalue intended to defraud creditors under the Insolvency Act 1986 s 423. Sequana also cross-appealed the High Court’s decision that the Dividend should be set aside as a transaction at an undervalue intended to defraud creditors. However, the Court of Appeal upheld the first instance decision on this discrete matter.

The principal task for the Court of Appeal was therefore to determine whether a Creditor Duty existed, and if so, when the duty arose, and specifically whether it had engaged by the Date of Distribution. BTI’s submission was that the Creditor Duty should arise in circumstances where there is a “real, as opposed to remote, risk of insolvency”; a significantly lower bar than the test set by Rose J in the first instance decision. In the leading judgment, Richards LJ affirmed that there were circumstances in which directors were obliged to consider the interests of creditors, noting that the court was bound by this rule following the decision in Liquidator of West Mercia Safetywear Ltd v Dodd [1987] 11 WLUK 231. However, although the Court of Appeal accepted the existence of a Creditor Duty, it adopted a near-identical test to the High Court as to when the duty was triggered. The court expressly rejected any assertion that the duty should be imposed as early as when there is a real, but not remote, risk of insolvency at an unidentified future date. The Court of Appeal accepted that such a test would unfairly hinder legitimate business activities and risk taking by company directors.

In adopting this test, the Court of Appeal subsequently dismissed BTI’s submission that the Dividend was paid in breach of the fiduciary duties of AWA’s directors. It held that AWA was not insolvent, or likely to become imminently insolvent, at the Date of Distribution, even though there was a real risk of the future insolvency of the company. Accordingly, the Dividend had not been distributed in breach of the Creditor Duty.

The Court of Appeal went on to opine on a fundamental point. Although the duty had not arisen on the facts, once the Creditor Duty had been engaged, Richards LJ explained that it was “hard to see that creditors’ interests could be anything but paramount”. In doing so, the Court of Appeal implied that in these circumstances, directors would be bound to treat the creditors’ interests as primary when making decisions on behalf of the company.

Summary of the Supreme Court’s findings

The Court of Appeal’s determination that the Dividend should be set aside as a transaction at an undervalue intended to defraud creditors was not appealed to the Supreme Court. However, BTI successfully obtained permission to appeal the Court of Appeal’s findings on the Creditor Duty.

The principal argument brought by BTI was that the High Court and Court of Appeal had incorrectly applied the test for when the Creditor Duty should be engaged. BTI contended that the duty should be engaged as soon as the directors know, or ought to know, that there is a ‘real risk’ the company will become insolvent. The Supreme Court concluded that although there were circumstances in which directors owed a Creditor Duty, this duty would not be triggered by a mere ‘real risk’ of insolvency. It therefore unanimously dismissed the appeal, in which Lord Briggs gave the leading judgment. The judgment focussed on determining four issues:

Is there a separate duty which obliges directors to have regard to the interests of creditors?

The court was unanimous in determining that, in certain circumstances, directors do owe a duty to creditors to have regard to their interests when making decisions on behalf of the company. This duty was founded in common law. However, crucially, it had been preserved by Parliament through the Companies Act, s 172(3), which requires directors “in certain circumstances, to consider or act in the interests of creditors of the company” pursuant to any enactment or rule of law.

Although the Creditor Duty was recognised by the Supreme Court, BTI’s submission that the duty was a “free-standing duty” enforceable by creditors was rejected. Lord Reed and Lord Briggs concluded that the Creditor Duty could not exist as a separate duty; it merely amended the content of the existing duty for directors to act in good faith in the interests of the company. Therefore, in circumstances where the Creditor Duty was engaged, the ‘interests of the company’ would be held to also include the interests of creditors; in addition to those of the members and it was not conceivable that the directors would be required to have regard to the interests of specific categories or classes of creditors.

When is the Creditor Duty triggered?

Although it affirmed the existence of the duty, the Supreme Court emphasised that the critical question for determination in the appeal was when the Creditor Duty was triggered. Lord Reed and Lord Briggs dismissed BTI’s argument that the Creditor Duty should be engaged in circumstances where there was a “real and not remote risk of insolvency”, holding that this was not a sufficient trigger for the duty. The court preferred different, but near-identical, formulations of the test, consistent with the Court of Appeal’s findings. Lord Reed and Lord Hodge adopted a formulation that the Creditor Duty would only be engaged when the company was “insolvent or bordering on insolvency“, in harmony with the position adopted in Bilta (UK) Ltd (No 2) v Nazir [2015] UKSC 23. Lord Briggs’ preference was for the duty to only be engaged where the directors knew, or ought to have known, of the company’s “imminent insolvency”.

The Supreme Court was moreover unanimous in affirming that the test for determining a company’s solvency should be the definition in the Insolvency Act 1986, s 123; namely whether the company is unable to pay its debts as they fall due (the cash flow basis) or whether the company’s assets exceed its liabilities (the balance sheet basis).

What are directors required to do when the Creditor Duty has been engaged?

It was held that the Court of Appeal was incorrect to conclude that when the Creditor Duty was engaged, creditors’ interests then became ‘paramount’ to directors. The Supreme Court found that during the period between the Creditor Duty being triggered, but prior to the company entering into formal insolvency, the correct interpretation is that directors are required to give the interests of creditors “appropriate weight”, and balance these against the interests of shareholders when making decisions on behalf of the company. The appropriate weight was fact-specific, but greater weight should be given to creditors’ interests as the likelihood of the company avoiding insolvency reduces.

The court emphasised that directors were not required to treat creditors’ interests as ‘paramount’ once the Creditor Duty was engaged. The court noted that its conclusion was based on (i) its interpretation of the discrete duties owed by company directors under the Companies Act 2006, s 172; and (ii) practical common sense, principally to avoid situations where directors would be forced to give effect to creditors’ interests in situations where the company is only temporarily insolvent on a cash-flow or balance sheet basis.

What duties do directors owe to creditors when an insolvent liquidation or administration becomes inevitable?

The Supreme Court held that in circumstances where the liquidation or administration of a company has become inevitable, directors must treat the interests of creditors as paramount. At this time, directors must give priority to the creditors’ interests – not those of the shareholders – and take all reasonable steps to minimise losses to creditors, to avoid personal liability for wrongful trading under the Insolvency Act 1986, s 214.

Comment

To quote Lady Arden, the Supreme Court’s judgment constitutes a “momentous decision” in the sphere of company law. The highest court has affirmed for the first time that directors of a company are required to take into consideration the interests of creditors, and balance these with the shareholders’ interests, when making decisions in the best interests of the company. However, in doing so, the Supreme Court has offered welcome relief to directors that a high bar must be reached before such a ‘Creditor Duty’ is engaged, namely only when directors know, or ought to know, that the company is insolvent or bordering on insolvency. In rejecting BTI’s submission that the duty should apply as soon as there is a ‘real risk of insolvency’, the Supreme Court appears to have been attempting to remedy concerns that an unfair burden may be placed on company directors if an earlier and less precise test was adopted.

The Supreme Court’s decision has also helpfully emphasised the long-held view that when creditors lend funds to businesses, they do so at their own risk, and as large commercial entities they are expected to take adequate steps to protect their own commercial interests through means other than a Creditor Duty.

However, although the decision delivers some clarity on the circumstances when the Creditor Duty arises, the test for when a company is insolvent or bordering on insolvency remains, by its nature, fact-sensitive. This decision is unlikely to change the fact that directors will still face ambiguity and difficult deliberations when concluding whether the test has been met in their specific circumstances, a concern expressly raised in Lord Reed’s judgment. Furthermore, since this is the first occasion in which the Supreme Court considered the question of whether a Creditor Duty can arise prior to insolvency, it is anticipated that any certainty afforded by the judgment could be extinguished by future decisions by the lower courts which attempt to refine the scope of the duty.

Given the inherent vagueness of the test for the imposition of the Creditor Duty, it is critical that directors continue to seek regular input from their advisors on their company’s financial position, and separately keep themselves informed of any liquidity concerns. Directors will need to continue to give adequate consideration to the interests of creditors, particularly where boards become aware of consistent financial difficulties.

Hearings in the Supreme Court are now shown live on the Court’s website.

On Wednesday 26th and Thursday 27th October, the court will hear the case In the matter of an application by Rosaleen Dalton for Judicial Review (Northern Ireland), on appeal from [2020] NICA 26. This case concerns whether the procedural obligation to investigate pursuant to Article 2 of the European Convention on Human Rights applies to the state in respect of Mr Dalton’s death after he died in a bomb explosion claimed to be the work of the IRA.

The following Supreme Court judgments remain outstanding: (As of 20/10/22)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
Fearn and others v Board of Trustees of the Tate Gallery heard 7th December 2021
Stanford International Bank Ltd (in liquidation) v HSBC Bank PLC, heard 19th January 2022
Commissioners for Her Majesty’s Revenue and Customs v NHS Lothian Health Board, heard 8th June 2022
Canada Square Operations Ltd v Potter, heard 14th June 2022
R v Andrewes, heard 21st June 2022
Hillside Parks Ltd v Snowdonia National Park Authority, heard 4th July 2022
DB Symmetry Ltd and another v Swindon Borough Council, heard 12th July 2022.
Reference by the Attorney General for Northern Ireland – Abortion Services (Safe Access Zones) (Northern Ireland) Bill, heard 19th July 2022
R (on the application of VIP Communications Ltd (In Liquidation)) v Secretary of State for the Home Department, heard 4th October 2022
of DCM (Optical Holdings) v Commissioners for His Majesty’s Revenue and Customs, heard 12th October 2022
McCue v Glasgow City Council, heard 18th October 2022
Unger and another (in substitution for Hasan) v Ul-Hasan (deceased) and another, heard 20th October 2022
In the matter of an application by Rosaleen Dalton for Judicial Review (Northern Ireland), heard 26th October 2022.

On appeal from: [2020] CSIH 14

This appeal concerns the correct approach to evidence and the burden and standard of proof in the context of historic claims for the recovery of input Value Added Tax (“VAT”). Input tax is the VAT incurred when the taxpayer buys in supplies which it uses for the purpose of a business activity.

The NHS Lothian Health Board (“NHS Lothian”) and its predecessors operated several scientific labs. The labs’ main work was providing clinical services to the NHS. This was a non-business activity and so any input VAT incurred on this type of work was not recoverable. However, the labs also undertook some external private work, which was a business activity so that input tax incurred for this type of work was recoverable.

NHS Lothian now claims unrecovered input tax in respect of external private work carried out in the period 1974-1997 (“the claim period”) under section 121 of the Finance Act 2008. It valued its claim by applying to the total amount of VAT incurred, the percentage of its activity that was business activity for the year 2006/2007. That percentage was 14.7%. This was then used as a baseline and adjusted to work out the proportion of total input VAT it was entitled to recover for each year over the claim period.

NHS Lothian’s claim was rejected by His Majesty’s Revenue and Customs on the ground, broadly, that NHS Lothian had not established that the method of valuing the claim was reasonable, in particular that it was justified in extrapolating the 14.7% figure to the earlier years. NHS Lothian appealed to the First-tier Tribunal, who dismissed the appeal. A subsequent appeal to the Upper Tribunal was also dismissed. On appeal to the Inner House of the Court of Session, the Inner House allowed NHS Lothian’s appeal. HMRC now appeals to the Supreme Court.

 

HELD- The Supreme Court unanimously allowed the appeal.

 

The Inner House’s description of the facts

The Supreme Court found that the Inner House misinterpreted a key aspect of the FTT’s factual findings. The FTT had not found that the proportions of NHS Lothian’s business and non-business activities were essentially the same across the claim period. Rather, the FTT’s finding was that there was not enough evidence to establish what that proportion was, whether it had changed over the years covered by the claim period or as between the end of the claim period and the year 2006/2007 from which the 14.7% was derived.

The nature of the right to deduct VAT input tax

The Inner House was wrong to treat the right to deduct some input tax as a right that is independent of the obligation on the taxpayer to quantify properly the amount of tax it could recover. It is not enough for a taxpayer to show that it has incurred some input tax for the purposes of its business activity. Proof of the amount incurred is a substantive precondition for the exercise of the right to deduct that or any amount. Generally, the taxpayer proves this by producing the VAT invoices from suppliers showing input VAT paid. Member States may, as the United Kingdom has, specify alternative evidence that can be relied on by the taxpayer but the taxpayer must present a credible method for estimating the amount of the claim with reasonable certainty.

The EU principle of effectiveness

The EU principle of effectiveness prohibits national laws which make claims based on directly effective EU law “virtually impossible or excessively difficult” to enforce. The principle of effectiveness does not require the ordinary rules on evidence and the burden and standard of proof to be departed from if the taxpayer cannot comply with those rules. The standard of proof applied to NHS Lothian’s claim is the balance of probabilities which applies in the same way to all historic tax claims. The rules of evidence applied in courts and tribunals are based on what evidence is likely to be helpful and fair. These were the rules applied in this case and there is nothing about them that created an unjustifiable hurdle. HMRC’s and the FTT’s approach did not make NHS Lothian’s claim virtually impossible or excessively difficult to enforce.

State fault and the EU principle of effectiveness

When applying the EU principle of effectiveness, the State’s conduct in setting procedural requirements to exercise rights is relevant. However, the question of whether the State’s conduct outside of this affects the application of the principle of effectiveness does not arise on the facts in this case because the additional State conduct identified by the Inner House does not establish any fault on the part of the UK Government. There was no failure on the part of the State to implement the recovery of input tax.

No error of law in the FTT’s decision

The Supreme Court held that the FTT decision as upheld by the Upper Tribunal was correct.

 

Judgment:

Judgment (PDF)
Judgment on The National Archives (HTML version)
Judgment on BAILII (HTML version)

Press summary:

Press summary (HTML version)

 

Watch hearing

8 June 2022
Morning session
Afternoon session

9 June 2022
Morning session

 

Watch Judgment summary

19 October 2022
Judgment summary

On appeal from: [2020] EWCA Civ 387

This appeal concerns the proper basis for awarding remedies in cases of proprietary estoppel. Proprietary estoppel arises when a person gives a promise or assurance to another person that they have or will be given an interest in property and that other person reasonably relies on the promise or assurance to their detriment.

The case arises from a dispute between members of a farming family over the future of the family farm. The Claimant is the eldest child of the Defendants who presently own the farm. The Defendants have another son (‘R), who is also a farmer, and a daughter (‘J’), who is not. The Claimant lived and worked on the farm with his parents for some 32 years after leaving school in 1982, with increasing responsibilities. The Claimant was paid for his work but at relatively low rates.

The Claimant had been promised by his parents that he would inherit a substantial but unspecified share of the farm, sufficient to enable him to continue a viable farming business after the father’s death. In fact, his parents had made wills in 1981 providing for him and R to inherit the farm in equal shares subject to financial provision of 20 percent of the estate for J.

However, from around 2008, the relationship between the Claimant and his parents began to deteriorate. In May 2014 the parents made new wills removing the Claimant’s inheritance. In April 2015 they dissolved their farming partnership with the Claimant and gave him notice to quit the property on the farm in which he and his family lived.

The Claimant issued proceedings alleging that he was entitled to a share in the farm or its monetary equivalent on the grounds of proprietary estoppel. The trial judge held that the Claimant had continued to work on the farm for little financial reward because he reasonably relied, to his detriment, on various assurances made by his parents as to his future inheritance of the farm. He thereby satisfied the conditions for the estoppel to arise.

The trial judge ordered the Defendants to make an immediate payment of £1.3 million (subject to certain adjustments) to the Claimant to satisfy his expectation as to what he would have inherited. This was calculated as 50 percent of the value of the dairy farming business plus 40 percent of the value of the freehold land and buildings at the farm.

Before the Court of Appeal, the Defendants argued that the trial judge had been wrong to fashion the remedy based on the Claimant’s expected inheritance. They argued that the award should instead have been calculated by reference to the Claimant’s contribution to the value of the farm or his loss of opportunity to work elsewhere. They also argued that the remedy wrongly accelerated the Claimant’s expectation, as he had not expected to receive an interest in the farm until his parents’ death. The Court of Appeal dismissed the appeal holding that it was appropriate to order a remedy by reference to the Claimant’s expectation and that the trial judge was entitled to make the order he did. The defendants appealed to the Supreme Court.

 

HELD: The Supreme Court allows the appeal in part and substitutes alternate remedies of either putting the farm into trust in favour of their children or paying compensation to the Claimant now but with a reduction properly to reflect his earlier-than-anticipated receipt. The Defendants are to be entitled to choose between these options.

 

Reasons for the Judgment

Lord Briggs identifies the purpose of proprietary estoppel as being to prevent or compensate for the unconscionability of a person going back on a promise upon which another person has relied to their detriment.

Following an analysis of previous case law, Lord Briggs concludes that historically the usual remedy was to enforce the promise, as the simplest way to remedy the unconscionability. However, when the circumstances made strict enforcement unjust the court could substitute a payment based upon (but sometimes less than) the value that the promisee expected to receive.

Lord Briggs rejects the idea that the aim of a remedy for proprietary estoppel ever has been (or should be) based on compensating for the detriment suffered by the promisee. The remedy should not be out of all proportion to the detriment suffered without good reason, but this only serves as a useful cross-check for potential injustice.

Lord Briggs considers that the court should start by determining whether going back on the promise is unconscionable at all in the circumstances. If it is, then the court should then proceed on the assumption that the simplest way to remedy that unconscionability is to enforce the promise to transfer the property in question, but it may have to consider alternatives such as providing a monetary equivalent, for example if the property has been sold or if its transfer would cause injustice to others. If the enforcement of the promise, or monetary equivalent, would be out of all proportion to the detriment to the promisee, then the court may need to limit the remedy. However, this does not mean it should seek precisely to compensate for the detriment to the promisee. If the remedy involves acceleration of a future promised benefit, it will generally require a discount for accelerated receipt. Finally, the court should consider in the round whether a particular remedy would do justice in the circumstances, by considering whether the promisor would be acting unconscionably if they were to confer the proposed benefit on the promisee.

Applying these principles Lord Briggs rejects the parents’ argument that the trial judge was wrong to adopt an approach based on the Claimant’s expected inheritance. However, he holds that the trial judge did not adequately discount the sum awarded to reflect the fact that the Claimant would receive compensation earlier than he had expected to inherit an interest in the farm.

Considering the remedy afresh Lord Briggs holds that the parents should be entitled to choose between putting the farm into trust for the children subject to a life interest in the defendant’s favour; or making an immediate payment of compensation on the lines the judge ordered but with sufficient discount to reflect the early receipt. If the amount of such payment cannot be agreed following valuation of the farm it will be remitted to the Chancery Division to determine the amount.

Lord Leggatt disagrees with Lord Briggs and considers that the core principle underpinning relief for proprietary estoppel is to prevent a party going back on a promise without ensuring that the party who relied on that promise will not suffer a detriment as a result of that reliance. To achieve this a court may either: (1) compel performance of the promise (or order equivalent payment to put the promisee in the position they would have been if the promised had been performed); or (2) award compensation to put the promisee into as good a position as if they had not relied on the promise. The court should adopt whichever method results in the minimum award necessary to meet the aim. On this basis Lord Leggatt would have awarded Andrew £610,000 to compensate for the detriment he has suffered as a result of working on the farm in reliance upon his parents’ assurances. This reflects the estimated additional amount the Claimant would have earned by working elsewhere [Appendix].

 

See here for the Judgment (PDF)

See here for the Press summary (HTML version)

Watch hearing

15 July 2021                Morning session         Afternoon session

In this post, Grant Arnold, a paralegal in the litigation team at CMS, previews the decision awaited from the Supreme Court in Unger and Anor (in substitution for Hasan) v Ul-Hasan (deceased) and Anor.

Factual Background

Ms Hasan and Mr Ul-Hasan married in Pakistan in 1981. The parties separated in 2006, before the husband obtained a divorce in Pakistan in 2012. Over the course of the marriage, Ms Hasan contends that the couple accumulated significant wealth.

In August 2017, Ms Hasan was given leave to bring proceedings for financial provision under the Matrimonial and Family Proceedings Act 1984, Pt III (“Pt III”) providing that, in certain circumstances, an English court can grant financial provision for a spouse following an overseas divorce. However, in January 2021, Mr Ul-Hasan died before Ms Hasan’s application could be decided. The decisive question for the court therefore centred on whether Ms Hasan’s unadjudicated claim under Pt III survived her husband’s death and could be continued against his estate.

The Decision of the High Court

Ms Hasan’s argument was that she was not bound by the authorities under the Matrimonial Causes Act 1973, Pt II (“Pt II”), nor those under the Inheritance (Provision for Family and Dependants) Act 1975, which hold that financial claims made during marriage or following divorce expire if either party has died before adjudication. As these authorities deal with domestic divorces relating to different statutes, Ms Hasan contended that the court was free to adopt a different approach under Pt III, for which the question had never previously been considered. It was, she claimed, a “blank canvas” for Mostyn J to decide.

On 2 July 2021, Mostyn J dismissed the application. It was observed that “Section 17 of the 1984 Act imports all the powers under ss.23 and 24 of the 1973 Act”, and further, that “Section 18(3) requires the court to exercise those powers in accordance with the terms of s.25 of the 1973 Act.” As such, the jurisprudence was held to be equally applicable as between claims made under Pt II, following a domestic divorce, and those under Pt III, following an overseas divorce, and to suggest otherwise, Mostyn J notes, would be the “height of artifice”.

With respect to the relevant authorities, Mostyn J acknowledged that the court was bound by the Court of Appeal decision in Sugden v Sugden [1957] P 120, whereby it was held that claims for ancillary relief were only enforceable post-death in circumstances where an effective order was already issued.

However, although Mostyn J was bound, he firmly disagreed with Sugden and set out his reasoning on three principal fronts:    

Based on a proper interpretation of the Law Reform (Miscellaneous Provisions) Act 1934, s1(1) claims for ancillary relief should be recognised as “causes of action” capable of subsisting post-death;
If the law permits certain types of claims to subsist post-death, such as civil claims in contract and tort, it is unclear why claims for ancillary relief are prohibited given that they are often more concrete and less speculative in nature;
The inconsistent approach between unadjudicated cases, and those in which the appeal courts’ exercise their discretion to either affirm, set-aside, or vary financial remedy orders where the party has died shortly after they’ve made the order.

On those bases, Mostyn J permitted either party to make a leapfrog application for leave to appeal to the Supreme Court pursuant to the Administration of Justice Act 1969, s.12(1).

Comment

It is now for the Supreme Court to decide whether they are persuaded by Mostyn J’s judgment. If in agreement, this would have a significant impact on the scope of divorce litigation where a party dies whilst proceedings are ongoing. Arguably, this opens the door to a financial claim being brought against an ex-spouse’s estate under the Matrimonial Causes Act 1973, rather than the potentially narrower route under the Inheritance Act 1975. As a matter of general public importance, it will be interesting to see what the Supreme Court decides.

Hearings in the Supreme Court are now shown live on the Court’s website.

On Tuesday 18th October the Court will hear an Assessment of Costs hearing in A Local Authority v JB. The hearing will be at 10:30 in Courtroom One, and will continue on Wednesday from 10:30. The Court will also hear McCue (as guardian for Andrew McCue) (AP) v Glasgow City Council, on appeal from [2020] CSIH 51. The Court will consider whether the Respondent’s charging policy for community care services is discriminatory. This hearing will take place at 10:30 in Courtroom Two.

On Wednesday 19th October, the Supreme Court will hand-down two judgments:

i. Guest and another v Guest [2022] UKSC 27 – on appeal from [2020] EWCA Civ 387

The appeal raises questions about the proper approach to granting relief under the doctrine of proprietary estoppel. The Supreme Court is asked to decide: (1) Whether a successful claimant’s expectation, in this case of inheritance of a family farm, was an appropriate starting point when considering a remedy; and (2) Whether the remedy granted, namely payment of a lump sum which would in effect result in the sale of the farm, went beyond what was necessary in the circumstances.

ii. Commissioners for His Majesty’s Revenue and Customs v NHS Lothian Health Board [2022] UKSC 28 – on appeal from [2020] CSIH 14

The Judgment will consider what is the correct approach that should be taken by the courts and tribunals to evidence and the burden and standard of proof in historical claims for the recovery of overpaid Value Added Tax.

On Thursday 20th October, the Court will hear Unger and another (in substitution for Hasan) v Ul-Hasan (deceased) and another, on appeal from [2021] EWHC 1791. The Court will consider whether an unadjudicated claim for financial provision under the Matrimonial and Family Proceedings Act 1984 survives the death of the respondent and can be continued against their estate. This hearing will take place at 10:30 in Courtroom One.

 

The following Supreme Court judgments remain outstanding: (As of 21/10/22)

The Law Debenture Trust Corporation plc v Ukraine (Represented by the Minister of Finance of Ukraine acting upon the instructions of the Cabinet of Ministers of Ukraine) Nos. 2 and 3, heard 9-12 December 2019
East of England Ambulance Service NHS Trust v Flowers and Ors, heard 22 June 2021
Fearn and others v Board of Trustees of the Tate Gallery heard 7th December 2021
Stanford International Bank Ltd (in liquidation) v HSBC Bank PLC, heard 19th January 2022
Commissioners for Her Majesty’s Revenue and Customs v NCL Investments Ltd and another, heard 25th January 2022
Canada Square Operations Ltd v Potter, heard 14th June 2022
R v Andrewes, heard 21st June 2022
Hillside Parks Ltd v Snowdonia National Park Authority, heard 4th July 2022
DB Symmetry Ltd and another v Swindon Borough Council, heard 12th July 2022.
Reference by the Attorney General for Northern Ireland – Abortion Services (Safe Access Zones) (Northern Ireland) Bill, heard 19th July 2022
R (on the application of VIP Communications Ltd (In Liquidation)) v Secretary of State for the Home Department, heard 4th October 2022
McCue (as guardian for Andrew McCue) (AP) v Glasgow City Council, heard 18th October 2022
Unger and another (in substitution for Hasan) v Ul-Hasan (deceased) and another, heard 20th October 2022

 

The second day of the Supreme Court hearing in the matter of a reference by the Lord Advocate of devolution issues under s.34 of Schedule 6 (the “Reference”) to the Scotland Act 1998 (the “Act”) took place on Wednesday. CMS Associates James Warshaw and Francesca Knight heard arguments from within the Supreme Court.

Day 2 of the hearing was just as busy as Day 1, with the media and the public keen to witness the close of this constitutionally significant hearing. Continuing on from the end of Day 1, the first part of Day 2 was taken up with the Advocate General’s submissions, made in opposition to the Reference by the Lord Advocate.

As it had been previously ordered that the issue of the court’s jurisdiction to hear the Reference should be rolled up with submissions on the substance of the Reference, the Advocate General (Sir James Eadie KC appearing) continued dealing with the jurisdiction issue before moving onto the substance.

Jurisdiction

The Advocate General submitted that the Reference was premature and as such the Court had no jurisdiction to hear it. He submitted further that the Court should decline to exercise its discretion in this regard.

Following on from submissions made the previous day concerning the use of s.33 of the Act (rather than s.34 of Schedule 6 in this case), the Advocate General spent some time looking at the legislative safeguards (such as in s.31 of the Act) which prevent the Scottish Parliament acting outside its competence.

The AG then proceeded to make a number of further points in relation to the jurisdiction issue. He addressed the issues that would arise if the Lord Advocate (or the other law officers) were to be allowed to make a Reference in respect of draft Bills, including the risk that references may be made in respect of policy ideas.

A running theme of the Advocate General’s submissions was that the Act was deliberately drafted in such a way as to ensure that only Bills which had been introduced to Parliament could be referred under Reference procedure.

Substance

The Advocate General then submitted that, even if the Court determined that it did have jurisdiction to hear the Reference, the answer to the Reference question should be ‘Yes’ i.e., that a referendum on Scottish independence relates to reserved matters and so is not within the legislative competence of the Scottish Parliament to legislate in this area. This was the case whether the referendum was legally binding/“self-executing” or advisory.

The Advocate General submitted that the draft bill clearly related to reserved matters, that being the Union of the Kingdoms of Scotland and England (under s.1(b) of Schedule 5 of the Act) and matters relating to the Parliament of the UK (under s.1(c) of Schedule 5). The fact that the referendum would not be ‘self-executing’ also did not mean it did not relate to the Union. The UK Parliament has deliberately reserved matters relating to the Union including questions about whether it should continue.

The Advocate General did not engage with SNP’s self-determination arguments as set out in their written pleadings.

Response

The Lord Advocate highlighted the constitutional importance of the Reference and criticised the Advocate General for belittling and undermining the importance of the issue. She said that the Reference “has been brought not because the issue is trivial or one that has been raised on a whim or willy-nilly. It is a matter of the utmost constitutional importance.” She submitted that the Reference had been brought responsibly, after detailed consideration, and at the request of the First Minister.

In response to the concerns regarding the potential opening of floodgates (ie the risk that policy ideas would be referred), the Lord Advocate highlighted that this is the first Reference in the history of devolution.

Judgment

Lord Reed commented that judgment would be delivered as soon as possible. However, as indicated on Day 1, the Court has more than 8,000 pages of written material to consider and it is likely to be some months before judgment is delivered.

On appeal from: [2020] CSIH 60

The claimant in this case is a VAT-registered business principally specialising in the sale of dispensed spectacles and laser eye surgery under the name Optical Express. VAT operates in large measure by self-assessment, with taxable persons submitting periodic self-assessment returns to His Majesty’s Revenue and Customs (“HMRC”). The claimant is a “partially exempt” person for VAT purposes, as it makes both supplies on which VAT is chargeable (such as the supply of frames and lenses) and supplies which are exempt from VAT (such as dispensing services). Where a taxable person makes both taxable and exempt supplies, section 19(4) of the Value Added Tax Act 1994 (“VATA”) provides that the consideration (which was, in DCM’s case, the price paid for its goods and services) should be apportioned between the taxable and exempt elements.

The first issue before the Supreme Court concerned an assessment issued to the claimant by the respondent on 20 October 2005 which was disputed in relation to under-declared output VAT (the VAT on DCM’s sales) for accounting periods from October 2002 to July 2003. When faced with an incomplete or incorrect VAT return, section 73 of VATA empowers HMRC to make an assessment of the VAT due not later than whichever is the later of (a) two years after the end of the accounting period; or (b) one year after evidence of facts comes to HMRC’s knowledge which is, in HMRC’s opinion, sufficient to justify making the assessment. DCM argued that HMRC knew that “something was wrong” with its apportionment method by January 2004 and, from then, had one year to make their assessment. This meant that they were out of time to do so for the relevant accounting periods by October 2005, making their purported assessment invalid (“time bar challenge”).

Where VAT is charged to a taxable person on goods and services that it purchases, it is possible for that person to reclaim it as input VAT by setting it off against its output VAT. Under section 25(3) of VATA, if there is no output VAT or the amount of input VAT exceeds its output VAT, then the amount of the excess must be paid to the taxable person by HMRC as a VAT credit. The second issue before the Supreme Court concerns disputed decisions by which HMRC reduced the VAT credits which DCM had submitted in its returns. DCM argued that HMRC did not have the power to make the relevant reductions as section 25(3) of VATA mandated HMRC to pay DCM the VAT credits which it claimed (“vires challenge”).

DCM was unsuccessful in both of its challenges before the First-Tier Tribunal, although the Upper Tribunal allowed the time bar challenge. The Inner House of the Court of Session allowed HMRC’s appeal on the time bar challenge and dismissed DCM’s appeal on the vires challenge.

 

HELD – Appeal unanimously dismissed. The Supreme Court dismissed DCM’s vires challenge as HMRC did have the power to make the relevant reductions.

Issue 1: The time bar challenge

It was common ground between the parties that “knowledge” in section 73 of VATA meant actual, rather than constructive, knowledge (constructive knowledge being knowledge which HMRC did not, in fact, have, but which they could have had if they had taken the necessary steps to acquire it).

The Supreme Court holds that, when considering section 73 of VATA, a court must first decide what were the facts which, in HMRC’s opinion, justified the making of the particular assessment and then determine when the last piece of evidence of those facts was communicated to HMRC. It is from this date that the period of one year begins to run. HMRC obtained the last pieces of evidence relevant to the assessment of October 2005 (including, for the first time, from DCM’s VAT account) on 31 August and 1 September 2005, before which time HMRC did not have evidence of facts sufficient to justify that assessment. It was then that the clock began to run. The Supreme Court therefore dismisses DCM’s time bar challenge as HMRC were not out of time to make that particular assessment.

 

Issue 2: The vires challenge

HMRC’s powers are set out in statute either expressly or by implication.

It was common ground that HMRC have both a power and a duty to conduct a reasonable and proportionate investigation into the validity of VAT credit claims. That being accepted, the Supreme Court finds that the question becomes whether HMRC have the power to give effect to the result of this verification process by refusing to pay a claim. There is no express power to refuse to pay a claim so any power to do so, if it exists, must arise by implication.

The Supreme Court finds that it is implicit in section 25(3) of VATA that the obligation on HMRC to pay a VAT credit arises only once it is established by the verification process that the VAT credit is due: the obligation to pay does not depend solely on the say-so of the taxable person. The existence of a power and duty to verify and, where justified, refuse to pay a claimed VAT credit is not inconsistent with the statutory provisions of VATA, and is implicit in HMRC’s duty to “be responsible for the collection and management of VAT,” as set out in paragraph 1 of Schedule 11 to VATA. The implied power is consistent with the purpose of ensuring that the taxable person pays the right amount of VAT or receives the right amount of VAT credit.

The implied power is also consistent with the principle of fiscal neutrality, which underpins VAT jurisprudence and tasks HMRC with verifying a taxable person’s claims and refusing to pay sums which are not due. It does not involve unjustified discrimination between payment traders and repayment traders.

 

See here for the Judgment (PDF)

See here for the Press summary (HTML version)

Watch hearing

8 Feb 2022           Morning session               Afternoon session