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IN
THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
CROWN OFFICE LIST
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CO/4318/1998
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Royal Courts of Justice
Strand
London WC2A 2LL
Tuesday, 8th February 2000
B e f o r e
MR JUSTICE LIGHTMAN
BETWEEN:
MIRROR GROUP NEWSPAPERS LTD
Appellant
and
THE COMMISSIONERS OF CUSTOMS AND EXCISE
Respondents
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
_________
Mr D Milne QC and Mr G Sinfield (Instructed by Messrs Lovells, 65
Holborn Viaduct, London EC1A 2DY) appeared on behalf of the Appellant.
Mrs M Hall (Instructed by the Solicitor of Customs and Excise, New
King's Beam House, 22 Upper Ground, London SE1 9PJ) appeared on behalf of the
Respondents.
Judgment
As Approved by the Court
Crown Copyright ©
MR JUSTICE LIGHTMAN:
INTRODUCTION
1. This is an appeal by Mirror Group Plc ("Mirror") against a decision dated
the 24th September 1998 ("the Decision") of the Value Added Tax and Duties
Tribunal ("the Tribunal") in favour of the respondents, the Commissioners of
Customs and Excise ("the CCE"). In question is whether an issue of shares
constitutes a supply for VAT purposes. This is a question of practical
importance and a subject of debate in tax literature. The Tribunal in
Swallowfield plc v. CCE [1992] 2 VATTR 211 held that the answer was in
the affirmative; on appeal McCullough J. refused an application to refer the
question to the European Court; and the substantive appeal was subsequently
settled. The Tribunal in the present case took the same view as it took in the
earlier case. Prior to the present case there was no subsequent consideration
of this question by the Tribunal or any court in this country or (apparently)
in any court in the European Union. Mirror on this appeal submits that an
issue of shares cannot constitute a supply or at the least there is real doubt
whether it can and that I should accordingly refer the question to the European
Court.
AGREED FACTS
2. The question whether the issue of shares constitutes a supply is
determinative of the claim made by Mirror to recover VAT which it has paid. In
May 1992 Mirror, which at that time was a wholly owned subsidiary of RM
Holdings Limited, made an issue of shares under which the public was invited to
subscribe for shares in Mirror under an arrangement with Salomon Brothers
International Limited, Nat West Bank plc and Lloyds Bank plc. A total of
196,392,000 ordinary shares were issued of which 72,332,300 were issued to
non-EU residents and 124,059,700 were issued to EU residents. Mirror incurred
VAT of £1,530,997.88 in respect of fees of legal, financial and other
advisers in connection with the issue. The purpose of the issue of shares was
to raise finance for the expansion of Mirror's business and the funds raised
were used for this purpose. Mirror maintained that it was entitled to recover
the full sum of £1,530,997.88 as input tax incurred on its general
overheads. Issue was joined by the CCE whether this was the correct analysis
or whether the input tax was wholly attributable to an exempt supply, in which
case there was no such entitlement. The CCE ruled that the share issue was a
supply of services, that such supply was an exempt supply and that the
£1,530,997.88 was accordingly not recoverable as input tax incurred on its
overheads; that, as an exception to the general rule that no input tax on
exempt supplies is recoverable (an exception created by Article 17(3)(c) of the
Sixth Directive which is set out below), input tax was recoverable on the
proportion of the fees attributable to the issue of shares to non-EU residents;
and that accordingly some £689,130 was recoverable but the balance of
£841,814.88 was irrecoverable. The Tribunal on the appeal by Mirror
upheld this ruling. Mirror now appeals to this Court.
RELEVANT LEGISLATION
3. The relevant provisions of the Sixth Directive are as follows:
"Article 2
The following shall be subject to value added tax:
1. the supply of goods or services effected for consideration . .. by a taxable
person acting as such; ...
Article 4
(1) `Taxable person' shall mean any person who independently carries out in any
place any economic activity specified in paragraph 2, whatever the purpose or
results of that activity.
(2) The economic activities referred to in paragraph 1 shall comprise all
activities of producers, traders and persons supplying services ....
Article 5
(1) `Supply of goods' shall mean the transfer of the right to dispose of
tangible property as owner ...
Article 6
(1) `Supply of services' shall mean any transaction which does not constitute a
supply of goods within the meaning of Article 5. Such transactions may
include inter alia:
- assignments of intangible property ...
- obligations to refrain from an act or to tolerate an act or situation ...
Article 13
Exemptions within the territory of the country.
13A Exemptions for certain activities in the public interest.
...
13B Other exemptions
13 Without prejudice to other Community provisions, Member States shall exempt
...
(d) the following transactions:
(1) the granting ... of credit ...
(5) transactions ... in shares
13C Options
Member States may allow taxpayers a right of option for taxation in case of
:
... (b) the transactions covered by B(d) ...(5) above.
Article 17
Origin and scope of right to deduct.
17(1) The right to deduct shall arise when the deductible tax becomes
chargeable.
17(2) In so far as the goods and services are used for the purposes of his
taxable transactions the taxable person shall be entitled to deduct from the
tax which he liable to pay:
(a) value added tax due or paid within the territory of the country in respect
of goods or services supplied or to be supplied to him by another taxable
person ...
17(3) Member States shall also grant every taxable person the right to the
deduction or refund of value added tax referred to in paragraph 2 in so far as
the goods or services are used for the purposes of: ...
...(c) any of the transactions exempt pursuant to Article 13 ...
(d) (1) to (5) when the customer is established outside the Community ..."
4. The Sixth Directive is implemented within the UK by the Value Added Tax Act
1994 ("the Act"). I only need refer to one provision of the Act:
Section 31
(1) A supply of goods or services is an exempt supply if it is of a description
for the time being specified in Schedule 9 ...
Schedule 9 Group 5
Item No 6. The issue, transfer or receipt of, or dealing with any security ...
being
(a) shares, stocks, bonds, notes ... debentures, debenture stock ..."
AREAS OF COMMON GROUND
5. It is common ground in this case that: (1) Article 4 confers a very wide
scope on VAT (see Van Tiem [1993] STC 91 at 106 para 17) and gives a
residual definition to the supply of services (see Mohr [1996] STC 328
at 334 para 26); (2) Mirror is a "taxable person" carrying on the business of
publisher and it made the issue of shares "acting as such" within the meaning
of Article 2; (3) the issue of shares did not constitute "the supply of goods"
within Article 5; (4) the contract for the issue of the shares (in the same way
as a contract for the making of a loan at interest) was a transaction imposing
directly related reciprocal legal obligations on the parties to it and was for
consideration; (5) if the issue of shares was a supply of services, it was an
exempt supply and any input tax directly attributable to such supply was
irrecoverable (see Article 17(2)) except to the extent that the shares were
issued to persons resident outside the EU (see Article 17(3)(c)); (6) if the
issue of shares was not a supply, as a "fully taxable person" Mirror was
entitled to deduct and recover any input tax attributable to the issue,
treating it in a similar way to input tax on general overheads; (7) in order to
determine whether a service is supplied, it is necessary to examine the
transaction in question in the light of the aims and characteristics of the
Community VAT legislation (see Advocate General Francis Jacobs QC in
Mohr [1996] STC 328 at 334, paras 2 and 26); (8) there is a divergence
in practice within the EU on the treatment of share issues: in some Member
States it is treated as a supply and in some it is not.
SUPPLY OF SERVICES
6. It was submitted by Mrs Hall (Counsel for the CCE) and accepted by Mr Milne
(Counsel for Mirror) that for an issue of shares to constitute a supply of
services within Article 6, it must be shown that it bears six characteristics
of a supply of services:
(1) it must have constituted a transaction;
(2) something must have been done by the person said to have made the
supply;
(3) that which was done must not fall within the definition of a supply of
goods;
(4) that which was done must have been capable of being used by and for the
benefit of an identified recipient (see Mohr v. Finanzant Bad Segeberg
[1996] STC 328 at 337 para 21);
(5) the benefit given to an identified recipient must be capable of being
regarded as a cost component of the activity of another person in the
commercial chain (see Landboden [1998] STC 171 at p.180-1 para 23);
and
(6) that which was done must have been done for a consideration:
(a) there must be a legal relationship between the provider of the service and
the recipient;
(b) pursuant to that relationship there must have been reciprocal
performance;
(c) to amount to consideration the remuneration received by the provider of the
service must constitute the value actually given in return for the service
supplied: (see Tolsma [1994] STC 509 at 516 para 14) and must be capable
of being expressed in monetary terms (see Tolsma at 5.12 para 14).
7. Mrs Hall goes on to submit that the issue of shares bears all the six
required characteristics, and again Mr Milne agrees. The critical question is
whether the issue of shares must bear some other, and if so what,
characteristic. Mrs Hall argues that no requirement for any further
characteristic to be borne by an issue of shares in order to qualify as a
supply of services can be found in the Sixth Directive or any European Court
judgment. She finds some support for her claim than an issue of shares does
qualify in the language of article 13B(d)(5) which expressly exempts from VAT
"transactions in shares", a term apt to include issues of shares, and a term
spelt out to include issues of shares in Schedule 9 of the Act. The conferment
of the exemption is a dispensation from an otherwise presumed liability for
VAT, a liability which may be reinstated under Article 13C if the appropriate
national legislation is passed and the option exercised (see Fischer
[1998] STC 708 at 722 para 18). Mrs Hall concedes however that the conferment
of the exemption does not itself establish that an issue of shares is a supply
of services. Mr Milne submits that there is a further characteristic required,
namely there must be some transfer of the resources of the person making the
supply to the other party or at least some depletion of the resources of the
person making the supply. Thus the sale in the course of his business by a
taxable person of shares will constitute a supply, for it involves such a
transfer; and so will the grant by a freeholder of a lease for, even if it does
not involve a transfer, it involves a depletion of resources insofar as the
freeholder deprives himself of the right to possession; but the issue of shares
in the taxable person in the course of his business by the taxable person
involves neither a transfer nor depletion of resources.
AUTHORITIES
8. The authorities cited to me throw some light on three separate questions
namely the breadth of the term "supply of services", what in a context close to
that in question constitutes a taxable person and what for this purpose
constitutes an economic activity. The decisions in Polysar Investments
[1993] STC 222, Harnas & Helm CV [1997] STC 364 and Sofitam
[1997] STC 226 establish that on its own the mere receipt of dividends on
shares or interest on bonds is simply the result of ownership of property, and
does not involve an economic activity, and accordingly does not constitute the
recipient a taxable person. The decision in Regie Dauphinoise [1996] STC 1176 establishes that the receipt of interest on a loan may however form
part of the lender's original or extended economic activity and in that case
the making of the loan will be regarded as a supply of services by the lender.
It is common ground in this case that the sale of the shares was part of the
economic activities of Mirror and Mirror issued the shares acting as a taxable
person. This group of cases is accordingly of no real assistance on the issue
before me.
9. BLP Group plc v. CCE [1995] STC 424 establishes that (a) the sale by
a taxable person of issued shares constitutes the supply of services (albeit an
exempt supply) by the vendor; (b) the borrowing by a taxable person of funds
(whether or not on security) does not of itself constitute a supply of services
by the borrower; and accordingly (c) the choice by a taxable person of the
means of raising funds, whether by the sale of shares or by borrowing, has VAT
consequences and the existence of these consequences may be a relevant factor
to be borne in mind in choosing which means to adopt. Neither the Advocate
General nor the Court in that case considered the question whether an issue of
shares constituted a supply. But the three propositions which it clearly
establishes rules out any argument advanced by Mr Milne that an issue of shares
should have the same VAT treatment as a borrowing since they are both
alternative means of raising resources: there is no reason why each of the
means available may not have distinct VAT consequences. Mr Milne however seeks
to find support for his insistence on the necessity in case of a supply of a
transfer or depletion of resources in a passage in paragraph 47 of the Opinion
of the Advocate General which reads as follows:
"The objectives of the common system of VAT do not by any means require all
forms of raising money to be treated alike. If the harmonisation introduced
with that system is intended to prevent distortion of conditions of
competition, as is expressed in the recitals to the First Directive, that can
only mean that operations of the same type are to be treated in the same way.
The taking up of a loan and the selling of an interest in a company are not,
however, operations of the same type for the purposes of the VAT system,
because that system focuses on transactions and makes a clear distinction
between taxable and exempt transactions. (Nor are they either, moreover,
for an undertaking's operational purposes, since the income from the sale of
shares is part of the undertaking's own resources, whereas the loan is part of
its borrowed resources.) If a taxable person sells an interest in a
company, he is effecting an (independent) transaction within the meaning of the
common VAT rules which, being an exempt transaction, excludes deduction of the
incident input tax. If, by contrast, he takes up a loan, he does not himself
thereby effect a transaction within the meaning of those rules. Instead he is
the recipient of a service, which is the subject of a transaction by a third
party. Under those circumstances the input tax charged on the advisory
services supplied in connection with taking up the loan may be deducted, if it
is attributable to taxable transactions.
Mr Milne focuses on the passage which I have underlined.
I find no support for Mr Milne's proposition in this passage. The Advocate
General is not in that passage explaining why the two forms of transaction have
different VAT consequences, but rather pointing to a difference between the two
forms of transaction from the viewpoint of the undertaking in question. He is
not saying that a transaction which merely increases the undertaking's
resources, where there is no disposal or exploitation of its own resources,
cannot constitute a supply by that undertaking.
10. I am satisfied that the issue of shares to a subscriber does constitute a
supply of services for consideration capable of being expressed in monetary
terms (namely payment of the subscription): there is no basis to be found in
the Sixth Directive or any decision of the European Court, in reason or
otherwise, for any requirement for any further characteristic beyond the six
agreed such as is suggested by Mr Milne. The borrowing of a loan lacks this
characteristic and does not constitute a supply by the borrower, but the reason
why the borrower does not make a supply is that, far from making a supply to
the lender, he is the recipient of a supply from the lender, and far from
receiving consideration capable of being expressed in monetary terms from the
lender, he is providing such consideration (namely interest). To hold that the
borrower makes a supply would be to turn the Community VAT concept of supply on
its head. On the other hand to recognise an issue of shares as a supply is to
treat the issue of shares the same as the sale of shares from which it is for
the purposes of Community VAT legislation indistinguishable: they share the
same essential ingredient, namely the vesting by the "vendor" in the
"purchaser" for monetary consideration of like intangible property. As the
Tribunal aptly put it:
"If the purchasers of shares in BLP were consumers, I see no logical reason for
distinguishing the subscribers in the present case."
Article 13B(d)(5), 13C(b) and 17(3)(c) (and for what it is worth Section 31(1)
and Schedule 9 Group 5 Item No 6(a) of the Act) confirm that the wide scope of
concept of supply of services is quite sufficient to embrace the issue of
shares.
11. If I considered that there was any real doubt whether the issue of shares
constituted a supply of services, I would refer the question to the European
Court for there is involved a question of practical importance and the
diversity in practice in European Member States is undoubtedly a significant
factor since this may so long as it lasts distort competition in share issues
in Member States. But whilst there is no decision of the European Court on
this specific issue, the guidance available in the existing authorities on the
applicable principles enables me to have no real doubt (as the Tribunal had no
doubt) what the answer is.
CONCLUSION
12. I accordingly hold that the issue of shares does constitute the supply of
services and that accordingly this appeal should be dismissed. I do so fully
appreciative of the invaluable assistance afforded to me by both Counsel expert
in this particular field of law.
*****
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