Shop Direct Group v Commissioners for Her Majesty’s Revenue and Customs

Under Income and Corporation Taxes Act 1988, section 103 charges corporation tax on sums which arise from a trade before its permanent discontinuance and are received afterwards. The charge is not confined to the former trader. It extends to any person beneficially entitled to receive and retain those sums.

Section 106(1) governs a transfer for value and charges the transferor by reference to the consideration or arm’s-length value. It does not govern a gratuitous transfer. Section 106(2) replaces the section 103 charge with a Case I charge only where the company continuing the business receives the transferred sums while it is trading. A later post-cessation receipt remains chargeable under section 103.

Companies in the Littlewoods group had overpaid VAT on supplies made between 1978 and 1996. HMRC repaid £124,963,600 to Shop Direct Group through solicitors appointed to receive it. By then, the trades from which the overpayments arose had been permanently discontinued. The First-tier Tribunal found that Shop Direct Group received the repayment as beneficial owner.

The First-tier Tribunal dismissed the companies’ appeals against amended corporation tax assessments. The Upper Tribunal dismissed a further appeal. The Court of Appeal, in [2014] EWCA Civ 255, upheld Shop Direct Group’s liability. The Supreme Court considered whether sections 103 and 106 of the Income and Corporation Taxes Act 1988 charged the repayment to corporation tax in the hands of a recipient which had not carried on most of the underlying trades.

1. Appeal dismissed unanimously. Lord Hodge delivered the judgment, with which Lord Neuberger, Lord Reed, Lord Carnwath and Lord Hughes agreed. The VAT repayment was chargeable to corporation tax in the hands of Shop Direct Group under section 103 of the Income and Corporation Taxes Act 1988.

2. Section 103 contains no implied restriction confining the charge to the former trader. Its language identifies the source and timing of the taxable sums: they must arise from the carrying on of the trade before its discontinuance and be received afterwards. It places no further restriction on the identity of the recipient. The statutory purpose was to prevent income arising from a discontinued trade from escaping tax merely because the source was no longer continuing in the year of receipt. The charge therefore extends to a person entitled to receive and retain the fruits of the discontinued trade.

3. The neighbouring provisions supported that construction. Section 105 distinguished between the person receiving the sums and the person who had carried on the trade. Section 108 likewise specifically identified receipts by the former trader or personal representatives when defining eligibility for a carry-back election. Those distinctions would have been unnecessary if section 103 applied only to the former trader.

4. Section 106(1) applies only to a transfer for value. It charges the transferor under section 103 by reference to the consideration or, for a non-arm’s-length transfer, the arm’s-length value of the right transferred. A gratuitous transfer falls outside subsection (1), but the resulting receipts may be taxed in the hands of the transferee under section 103.

5. Section 106(2) disapplies section 103 and substitutes a Case I charge only where a successor company receives the transferred sums while carrying on the continuing business. It does not create an exemption where the successor receives nothing while trading or receives the sums only after it has ceased trading. In those circumstances section 103 applies to the recipient.

6. The First-tier Tribunal had found that Shop Direct Group beneficially received sums arising from the discontinued trades and that the sums were not otherwise chargeable. There was no finding that any relevant right had been transferred for value, and the company to which Shop Direct Group’s trade was transferred did not receive the repayment. Neither limb of section 106 displaced the section 103 charge.

1. United Kingdom Supreme Court: Dismissed Shop Direct Group’s appeal and affirmed its liability to corporation tax under section 103 of the Income and Corporation Taxes Act 1988; [2016] UKSC 7.
2. Court of Appeal: Dismissed Shop Direct Group’s appeal from the Upper Tribunal; [2014] EWCA Civ 255; [2014] STC 1383.
3. Upper Tribunal (Tax and Chancery Chamber): Asplin J dismissed the appeal on 19 April 2013.
4. First-tier Tribunal: Dismissed the recipient companies’ appeals against HMRC’s amended corporation tax assessments; [2012] UKFTT 128 (TC).