These VAT overpayments were made on an incorrect understanding of law: the VAT was wrongly calculated when goods were sold to agents of the supplier with a discount for commission. The relevant supplies were made between 1978 and 1996 by companies within the group, including SDG.

VAT was paid to HMRC in relation to these supplies by the representative member of the group under section 43 of Value Added Tax Act 1994 (VATA 1994).

By 2007, following a series of reorganisations within the group, each of the companies which had made relevant supplies had permanently discontinued its trade.

In September 2007, SDG received the VAT repayment as beneficial owner at the time of receipt. The Supreme Court considered the issue of whether this was liable to corporation tax under the Income and Corporation Taxes Act 1988 (ICTA). 

Sections 103 and 106 of ICTA imposed a charge to corporation tax on post-cessation receipts from a trade, profession or vocation, in order to prevent tax avoidance by businesses choosing when to discontinue operating. [Shop Direct Group v Commissioners for Her Majesty’s Revenue and Customs [2016] UKSC 7 On appeal from [2014] EWCA Civ 255].

The Supreme Court unanimously dismissed SDG’s appeal, concluding that s103 does not contain an implicit restriction so that the charge to tax on post-cessation receipts falls only on the former trader whose trade was the source of the income.

Ruling on section 103

The judges gave three reasons in support of this conclusion.

First, there is nothing in the wording of s103 which necessitates such implication. The charge to tax is clear: where a trade has been permanently discontinued, corporation tax shall be charged on ‘sums arising from the carrying on of the trade… during any period before the discontinuance’.

Section 103(1) required only that the sums ‘are received’ after the discontinuance; it specified the source of the sums falling within the charge but imposed no further restriction.

Secondly, s103 was designed to catch the ‘fruit’ of the trade. Its aim was to make sure that sums which a person received, which arose from a discontinued trade and which were not otherwise taxed, were brought into a charge to tax. No sound policy reason has been suggested for confining the charge to the former trader and his personal representatives.

Thirdly, the neighbouring provisions of s103 drew a distinction between the person chargeable to tax and the person who had previously carried on the trade. This suggests that the former was not confined to the latter.

The court rejected SDG’s submission that the sum it received equivalent to the VAT repayment did not have a former trade as its source, but was the result of an intra-group arrangement which was either a transfer for no consideration of that sum, or a transfer for no consideration of the rights to the VAT repayment.

The judges said that under s103 of ICTA, the focus was on the original source of the receipt; the arrangements within the group as to the specific company that was to receive the VAT repayment did not alter that original source. As a result, SDG has to pay the corporation tax.

At the end of the judgment, the judge noted: ‘Before concluding, I would like to acknowledge the admirable decision of the First Tier Tribunal in this case, which involved grappling with many more factual and legal issues than this court has had to address.’

Read the Supreme Court decision