PM-Tax
Wednesday 27 May 2015
News and Views from the Pinsent Masons Tax team
In this Issue
Our Comment
•What can we expect from the Summer Budget? by Catherine Robins
2
•Corporate failure to prevent evasion by Jason Collins
•Australia’s answer to the diverted profits tax by Heather Self
6
Recent Articles
•Taxing times in the Middle East by Ian Anderson
•Recent pensions VAT developments by Darren Mellor-Clark
12
Our perspective on recent cases
Carver v HMRC [2015] UKFTT 0168 (TC)
French Connection Limited v HMRC [2015] UKFTT 0173 (TC)
Next Brand Ltd v HMRC [2015] UKFTT 0175 (TC)
Meena Seddon & Others v HMRC [2015] UKFTT 0140 (TC)
Events
16
People
18
NEXT
@PM_Tax
© Pinsent Masons LLP 2015
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PM-Tax | Our Comment
What can we
Title
expect from the
Summer Budget?
(continued)
by Catherine Robins
The Chancellor has announced a Summer Budget for 8 July. What tax changes can we expect under
the new Conservative government?
The fact that the Budget will not be happening until July suggests
that it will be more about setting out the government’s plans for the
future, than announcing measures which will have immediate effect
– although clearly another Finance Bill gives opportunities for
blocking any schemes that have recently come to HMRC’s attention.
The OECD’s final recommendations on its base erosion and profit
shifting project (BEPS) are due at the end of this year. Changes to
the UK tax system to implement the recommendations are likely
and the main area of concern for many businesses will be the
extent to which the UK’s rules on interest deductibility are
changed. This was identified as the number one concern by tax
directors responding to a recent survey by Tax Journal.
Key personnel
This time around we have continuity of key politicians involved in
tax policy, as George Osborne remains Chancellor of the Exchequer
and David Gauke has retained his position as Financial Secretary to
the Treasury and minister with responsibility for tax. David Gauke’s
continuation in the role will be welcomed by many as he is
generally well regarded by the tax community. Greg Hands
replaces Danny Alexander as Chief Secretary to the Treasury.
Companies want stability in the tax system, so lets hope that we
get another ‘corporate tax roadmap’ to give an indication of what
is proposed over the next five years.
Banks
The first Finance Act introduced an increase in the bank levy and
the Conservative manifesto included a commitment to retain the
levy. In the face of banks, such as HSBC, citing the bank levy as a
reason for considering relocating their headquarters away from the
UK, and with the election out of the way, we may see the
government beginning to row back from continuing to use
increases in the bank levy as a way to make up any shortfalls in tax
receipts or to fund vote winning measures for individuals.
One change of note is that Margaret Hodge has said that she will
not put herself forward as chair of the Public Accounts Committee
in this Parliament. The selection of a new chair will take place in
June and the position traditionally goes to an MP in the main
opposition party. It remains to be seen whether, under Margaret
Hodge’s successor, the PAC will be seen as such an intimidating
beast for HMRC officials and others hauled to appear before it.
A proposal to deny tax deductions for compensation payments by
banks to customers was announced in the Budget. Scant details
were given, but this is an area where we can expect a consultation
sometime this year.
Corporate tax
We know that clamping down on tax avoidance is likely to remain
high on the government’s agenda. There are significant concerns
from businesses about how the government is going to raise a
further £5 billion from a crack down on evasion and “aggressive
avoidance”, as pledged in the Conservative party manifesto.
Individuals
As far as individuals are concerned, we know from the Conservative
party manifesto that they plan to increase the personal allowance
and increase the threshold at which higher rate income tax is paid.
Increases in rates of income tax, national insurance and VAT over
the life of the Parliament were all ruled out in the manifesto – and
going even further in the election campaign, David Cameron
pledged to legislate within the first 100 days of a new government
for this “five-year tax lock”.
The new diverted profits tax (DPT) is already on the statute book
and groups will be anxious about how this is going to be
implemented in practice. DPT itself is not predicted to raise huge
amounts of revenue – after all who would pay tax at 25% if you
can reorganise your affairs to pay more corporation tax at 20%?
However companies will be concerned that HMRC will be looking
to use DPT as a stick to pressurise multinationals to adjust their
transfer prices and structures to pay an amount of UK corporation
tax that is seen to HMRC is being ‘more acceptable’. We may
therefore see more aggressive enquiries into possible permanent
establishments and into transfer pricing.
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PM-Tax | Our Comment
What can we expect from the summer Budget? (continued)
After Labour announced in the election campaign that they would
abolish non-dom status, the Conservatives suggested that they too
would look at changes possibly by limiting the extent to which
non-dom status can be inherited. The Conservatives have also
suggested they might further increase the remittance basis charge
– although it was increased in the Finance Act 2015.
Finance Bill process
The pre-election Finance Bill, which was rushed through Parliament
in a couple of days, without any serious debate and is now Finance
Act 2015, contained the measures which needed to be enacted in
order for taxes like income tax and corporation tax to be charged
for the current tax year. It also contained more controversial new
measures such as the new diverted profits tax.
The Conservatives’ election promises for individuals included a
transferable main residence allowance for inheritance tax, an
increase in the tax-free personal allowance to £12,500 and an
increase in the higher rate threshold to £50,000. However, these
changes were promised over the next five years and it is unlikely
that further changes would be made to thresholds for this tax year.
A consultation could be announced in relation to the transferable
inheritance tax allowance.
Following the 2010 election we had a further two Finance Bills – a
short one passed in July introducing the coalition’s key measures
and then a further one that did not receive Royal assent until
December 2010, with the less urgent items.
This year I would expect that we would only have one further bill
as the timing of the budget in July (it was June in 2010) means that
it would be difficult to get the bill through before the summer
recess. However, the Conservative promised to enact the five year
tax lock preventing increases in VAT, income tax and national
insurance within 100 days and so this will need to be made law
before the summer recess – probably in an act of its own, rather
than in a Finance Bill.
The manifesto said that the Conservatives would reduce tax relief on
pension contributions for employees earning more than £150,000.
Any changes here are more likely in next year’s Finance Bill.
Tax enforcement powers
In March of this year, the then Chief Secretary to the Treasury,
Danny Alexander, announced that the government would be
consulting on a new offence of “corporate failure to prevent tax
evasion or the facilitation of tax evasion”. This was also mentioned
in the Conservative party manifesto and so we are likely to hear
more in the budget about the proposals – and we may get a
consultation document over the summer. It looks as if this new
offence will be aimed at all corporates and not just banks and
professional services firms and could be based on Bribery Act
principles (see comment by Jason Collins in this edition of PM-Tax
for further details).
We will need a second Finance Bill this year to introduce the
measures which were published in draft in December but did not
make it into the first bill. These include non-controversial measures
such as the corporate rescue exemption from the loan relationship
provisions and more controversial measures such as the direct
recovery of tax debts from bank accounts. We will probably see this
bill become law before Christmas – hopefully following proper
consideration. In procedural terms, changes made following the
Fixed Term Parliaments Act mean that this bill would only need to
become law within seven months from the date that the Budget
resolutions are passed or take effect, in order for the measures it
contains to take effect for the current tax year.
We may also hear more about the strict liability offence for
offshore evasion, which was consulted upon last summer – but
seemed to have been quietly forgotten, until mentioned in the
March budget. We also expect to see the controversial provisions
regarding direct recovery of debts from bank accounts to be in the
second finance bill.
So although the Budget will probably not contain the usual raft of
anti avoidance measures which will apply imminently, it should
provide an interesting indication of the new government’s plans in
relation to tax. Tax practitioners can look forward to some meaty
consultation documents to read over the summer.
We may also hear about the outcome of the consultation in
relation to individual aspect closure notices. The controversial part
of this was that the proposed changes were all in favour of HMRC
and would not give taxpayers equivalent rights to refer a single
issue in dispute to the tribunal where there were other issues that
could not yet be resolved (see comments from James Bullock – PM
Tax 14 January 2015).
Catherine Robins is a Partner providing
technical assistance to clients and members of
the tax team on all areas of tax including
corporate finance and M&A work, private
equity, employment tax and property tax. She
is also the Editor of PM-tax.
E: catherine.robins@pinsentmasons.com
T: +44 (0)121 625 3054
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PM-Tax | Our Comment
Corporate
failure to
Title
prevent evasion
(continued)
by Jason Collins
This comment was published in Tax Journal on 15 May 2015
The Bribery Act has laid the foundation for a new criminal offence, which will require corporates to
conduct ever greater levels of due diligence. Before the election, we were given tantalising details of a
proposed new offence of ‘corporate failure to prevent tax evasion or the facilitation of tax evasion’. This
was announced in a rather bizarre ‘Yellow Budget’ given by former chief secretary to the Treasury,
Danny Alexander on 19 March, and was followed up in HMRC’s publication ‘Tackling tax evasion and
avoidance’. Although it was announced after the recent press coverage of the HSBC Swiss bank data
leak, the new offence appears to be intended to apply to all businesses and not just to the obvious
targets of banks, fiduciaries and professional services firms.
The background to these proposals was a call by David Green CB
QC, the head of the Serious Fraud office, for an extension of the
Bribery Act 2010 to all forms of economic crime. Under the Bribery
Act, corporates commit a strict liability offence if they fail to
prevent bribery by any ‘associated person’, even if they are
unaware of the conduct. As well as employees, associated persons
can include contractors, agents and subsidiary companies.
The subsidiary, but not its employees, would be an associated
person of the UK bank – so it may be necessary to prove some
involvement of employees of the UK bank. Alternatively, the mere
fact that the subsidiary was willing to accept UK customers
without strict controls around tax reporting may be enough to
show that the UK bank failed to prevent the subsidiary from
facilitating evasion.
Tax has always been intended to be one of the types of economic
crime to which the Act would be extended, but the tax proposals have
gone further by including the failure to prevent the facilitation of tax
evasion. This suggests that we may have a standalone tax offence.
Facilitation may cover any situation where the corporate or associated
person is merely a link or participant in another person’s crime.
If these proposals are introduced, all corporates can look forward
to the prospect of conducting ever greater levels of due diligence.
We may move to a world where corporates are expected to
demand assurances about tax compliance from all those with
whom they deal – and be unpaid inspectors of the tax system.
Jason Collins is Head of our tax group. He is
one of the leading tax practitioners in the UK
specialising in handling any form of complex
dispute with HMRC in all aspects of direct tax
and VAT, resolving the dispute through
structured negotiation and formal mediation.
Where necessary, he also handles litigation
before the Tax Tribunal and all the way
through to the European Court – with a
particular expertise in class actions and
“Group Litigation Orders”.
This might catch a bank’s relationship with its customers, but may
also include those businesses which operate in markets where
fraud is known to take place, such as payroll/status fraud, MTIC
fraud and duty fraud.
The defence to a charge of failure to prevent bribery is to show that
there were ‘adequate procedures’ in place to try to prevent bribery.
If the tax offence applies in a similar way, businesses will need to
have robust procedures in place to try to prevent associated
persons from engaging in or facilitating tax evasion. Some have
said that these offences are not needed, as anti-money laundering
(AML) rules cover most of this. But AML rules are engaged where
there is a suspicion of wrongdoing; whereas this offence is agnostic
to the corporate’s awareness. It is simply a matter of being able to
show that adequate procedures are in place.
E: jason.collins@pinsentmasons.com
T: +44 (0)20 7054 2727
The Bribery Act applies to corporates incorporated or with
significant activity in the UK. However, the associated person can
be anywhere. It would be interesting to see if this offence would
catch, for example, a UK bank with a Swiss subsidiary, where the
Swiss employees are facilitating tax evasion.
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PM-Tax | Our Comment
Australia’s answer
to
Title the diverted
profits tax
(continued)
by Heather Self
This comment appeared in Tax Journal on 22 May
Australia, like the UK, has announced new measures countering the diversion of profits by
multinationals. The measures increase the pressure on the US to engage with the OECD’s BEPS project.
When George Osborne announced the UK’s diverted profits tax
(DPT) in his Autumn Statement last December, I predicted that
other countries would follow suit. Sure enough, the Australian
Treasurer Joe Hockey has announced detailed proposals in his
recent Federal Budget.
It must be ‘reasonable to conclude that the scheme is designed’ to
avoid the foreign entity having a PE in Australia, and that the scheme
has a principal purpose of avoiding a charge to tax. Finally, the
foreign entity must be connected with income arising in a tax haven.
The wording is very similar to that in the UK’s avoided PE provisions
(FA 2015 s 86), but with more emphasis on the purpose of the
transactions and without the ‘no economic substance’ test. In
addition to apportioning profits to the avoided PE, withholding tax
will apply to any deemed interest or royalty payments of the PE,
and there may be penalties of up to 100% of the tax.
In the UK, the DPT was widely seen as a political pre-Election
measure, rushed through in response to the Public Accounts
Committee’s rhetoric about companies not paying their ‘fair share’.
Commentators on the Australian measure note the ‘febrile
atmosphere’ surrounding the Senate economic committee’s enquiry
into corporate tax avoidance. This, they say, is ‘not conducive to
getting the right legislative response’ and could lead to a ‘gross
overreaction’. Clearly, similar forces are acting in both countries.
It seems that both countries are firing warning shots across the
bows of US multinationals, making it clear that if BEPS does not
deliver, unilateral attacks will be launched. The US has begun to
threaten retaliation, and it may be that the threat of other
countries taxing their multinationals will finally lead the US to
implement reform of its own tax system. After all, if US companies
are going to pay more tax, surely the IRS will want to take the first
bite of the cherry?
Australia has decided that it does not need a separate DPT, but will
simply strengthen its existing anti-avoidance laws. This is clearly a
simpler solution legislatively, and is likely to be much more robust
to treaty challenge. In practice, though, it may be harder to
enforce. It is interesting that there was no revenue estimate
attached to the Australian proposals, as Hockey has said that he
‘was not going to make the mistake of banking money that was not
identifiable’. Unlike the UK, perhaps?
Heather Self is a Partner (Non-Lawyer) with
almost 30 years of experience in tax. She has
been Group Tax Director at Scottish Power,
where she advised on numerous corporate
transactions, including the $5bn disposal of
the regulated US energy business. She also
worked at HMRC on complex disputes with
FTSE 100 companies, and was a specialist
adviser to the utilities sector, where she was
involved in policy issues on energy generation
and renewables.
Australia’s GAAR (Part IVA) was introduced in 1981. Tax
arrangements with a ‘sole or dominant purpose’ of avoiding tax are
ignored, and in 2013 additional power was given to the
Commissioner to recharacterise transactions. The proposed
amendments will have an effective date of 1 January 2016. They
refer to arrangements with a ‘principal purpose’ of avoiding an
Australian PE, and acknowledge that there can be more than one
principal purpose.
E: heather.self@pinsentmasons.com
T: +44 (0)161 662 8066
The new rules will apply where income is derived by a foreign
entity from the supply of goods or services to unrelated Australian
customers; and there are activities carried out in Australia by an
Australian resident that is related to the foreign entity.
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PM-Tax | Recent Articles
Title (continued)
Taxing Times in the Middle East
by Ian Anderson
This article was published in Lexis Middle East Law Alert June/July 2015
Tax used to be an area of little interest in the Middle East but this is changing. Pinsent Masons’ new
Head of Tax for the Middle East, Ian Anderson examines the region’s rapidly changing tax landscape.
What’s happening?
The fall in global tax rates and a perceived ‘race to the bottom’ to
attract foreign investment has affected the GCC and Middle East
and North Africa (MENA) region, at least in the case of those
outside of the oil and gas sectors. The average corporate income
tax rate globally has fallen from an average of 29.5% in 2004 to
22.6% in 2014, and in the GCC average headline rates have halved.
This has prompted initiatives to broaden the tax base, increase
average indirect tax rates and impose additional withholding taxes.
Tax is one area where there is a lot currently going on. For a start
the Gulf Cooperation Council (GCC) countries have agreed to
formulate a framework to implement VAT within member states.
Kuwait is considering introducing a corporation tax and other GCC
countries have either implemented or are considering further tax
reform. As a result the perception that the Gulf is a tax free zone,
sheltered from the fiscal pressures affecting other countries and
largely untroubled by the noise in the international tax
environment, is becoming questionable.
Other developments
There have also been a series of updates to tax regulations by
authorities in the region to improve the overall effectiveness and
efficiency of their regimes.
You cannot look at regional developments without taking a global
view. The global tax environment is becoming progressively more
political with concepts like the ‘fair amount of tax’ making their
way into discussions on tax policy. Multinational corporations are
also being targeted by lobby groups and charities on the amount of
tax they pay and where they pay it.
One key area which is likely to develop in the future, is transfer
pricing. Kuwait, Saudi Arabia, Oman and Qatar to varying degrees
all apply the arm’s length principle to the analysis of transfer prices.
The BEPS initiative puts particular emphasis on provision of transfer
pricing documentation, abuses related to intangibles and the need
for multinational corporations to provide country by country
reporting on the global allocation of income and taxes. Current
transfer pricing regulations in the GCC are relatively
unsophisticated, but requirements for improved reporting in the
future may identify problems in the current policies, exposing
corporates to significant back taxes, penalties and interest. If your
business has cross border transactions between related entities you
should review your existing policies and pricing for the BEPS impact.
Aggressive tax planning and the use of tax havens is increasingly
regarded by the media as immoral and socially irresponsible.
Another driver, and one of the biggest recent international tax
stories, has been the US’s unilateral decision to tackle tax
avoidance by its own citizens through the Foreign Account Tax
Compliance Act (FATCA). This requires the reporting of the
overseas income of US taxpayers by non-US financial institutions,
including those in the GCC. The penalty for non-compliance is a
30% withholding tax on US income of the financial institutions.
Transparency and the exchange of information
Change is also being driven by increased media scrutiny of the tax
affairs of multinational companies and Group of 20 (G20) and
Organisation for Economic Co-operation and Development
(OECD) efforts to devise a tax system which is fit for an
increasingly digitalised world. The result is a clamp down on
so-called ‘tax havens’ and an improvement in the exchange of tax
information between institutions, regulators and countries. The
efforts so far have focused on Base Erosion and Profit Shifting
(BEPS) and the G20 has asked the OECD to develop an action plan
and make recommendations in this area.
In 2009 the OECD restructured one of their key tax initiatives, the
Global Forum on Transparency and the Exchange of Information for
Tax Purposes. Under the peer review process developed by the
Forum, countries were assessed on their ability to provide
information under treaty exchange of information requests, with a
review of supporting legislative frameworks and practical
experience of compliance.
Four GCC countries have voluntarily participated in this. Qatar and
Bahrain have completed phase 2 with a largely compliant assessment,
and Saudi and the UAE have progressed from phase 1 to 2.
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PM-Tax | Recent Articles
Taxing Times in the Middle East (continued)
common FATCA treaties and the commitment of over 80 countries
to developing a common reporting standard for automatic
exchange of information, a ‘global’ tax treaty could be possible.
FATCA
US FATCA introduced rather less voluntary disclosure. So far only
Qatar and Kuwait have signed a FATCA intergovernmental agreement
(IGA) with the US but it is expected all the GCC countries will
eventually sign a treaty. Final drafts have been initialed by Saudi
Arabia, the UAE and Bahrain. Under Model 1 IGAs financial institutions
report to their own tax authority which then provides the information
to the US. The first reporting to the US under a FATCA IGA could be as
early as 30 September 2015 – but financial institutions may be obliged
to report to their own tax authority earlier.
Unexpected disclosure
In November 2014 the International Consortium of Investigative
Journalists leaked details of over 540 tax rulings issued by the
Luxembourg tax authorities over a ten year period. These involved
340 corporate clients, including a number of GCC investors. The
disclosures (nicknamed ‘Lux Leaks’) exposed, in detail, the relevant
tax planning undertaken, the technical analysis, advisors and in
some cases even named in-house tax managers involved.
Companies named in the Lux Leaks have suffered adverse publicity.
Some people have suggested consumers should stop doing
business, in particular, with some of the well-known US owned
multinationals who are known to have used planning in
Luxembourg, Ireland and other low tax jurisdictions.
Automatic exchange of information
To date, 54 jurisdictions have signed a multilateral competent
authority agreement for the automatic exchange of information
between tax authorities based on the Common Reporting Standard
(CRS) developed by the OECD. Qatar, Saudi Arabia and the UAE
have committed to implementing the standard, at a later date. The
standard has many similarities to previously mentioned FATCA
treaties but instead of providing information on a unilateral basis
to the US as with FATCA, this agreement involves sharing
information between equal partners. CRS will apply to accounts
existing from 2016 and there could be significant practical and
political issues with CRS operations.
The European Commission is also investigating whether any rulings
given by Luxembourg and other EU member states breached EU
State aid law which could undermine a significant amount of
historic international tax planning, including that implemented by
investors from the GCC.
Even though there is no tax in a parent company’s jurisdiction, or
local disclosure requirements are less stringent, companies must
still be prepared to explain and justify the tax planning undertaken
by their business worldwide, particularly if they are in a customer
facing business relying on their reputation for sales. The fact that
the BEPS process will soon mean multinationals will have to
provide country by country reporting on taxes paid will only
increase the risk of bad publicity.
Taxpayers who mistakenly believed non-disclosure was ever a sensible
approach to tax planning, will find life more difficult in the future.
Tax treaties
One effect of the OECD’s work on international tax avoidance has
been an uptake in the number of tax treaties and exchange of
information agreements concluded globally. The GCC has not been
immune to this, and the significant increase in GCC tax treaties has
benefited local investors. Both the Dubai and Qatar financial
centres have been positioning themselves as regional hubs for
wider investment activities. Companies that have entered into
overseas investments and are currently benefiting from, for
example, lower withholding taxes under the terms of relevant
treaties, should watch out for the BEPS initiative and the recent
report on treaty benefits.
VAT
Despite the recent GCC VAT announcement, there is unlikely to be
any immediate windfall of VAT income for GCC countries. The
starting rate is likely to be low, with a high threshold for
registration. If it is matched by a reduction, or even elimination of
customs duties in the GCC the overall tax take will be dampened.
Hopefully, there will be consultation on the new rules, and a
suitable planning period before they take effect. VAT is a relatively
easy tax for tax authorities to collect but can create significant
compliance burdens for businesses. Accounting systems, many of
which lack VAT functionality, will need upgrading, processes
changed and contracts reviewed for where the VAT liability will fall.
There will also be questions around how VAT will apply within the
plethora of financial centres and free zones in the region.
The report looks at restricting the abuse of treaties, particularly the
practice of treaty shopping, e.g. by introducing limitation of benefit
clauses, similar to those used in US tax treaties. This would
potentially require the renegotiation of existing bilateral tax
treaties. There are more than 3,000 globally, so this will not
happen quickly. However a proposal is being developed to create a
multilateral instrument to modify bilateral tax treaties. The
likelihood of this might seem remote, but with the adoption of
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PM-Tax | Recent Articles
Taxing Times in the Middle East (continued)
Looking ahead
Although there is not the same public debate about acceptable tax
planning in this region as in Europe and the US, policy decisions in
the Gulf are being influenced by global initiatives so businesses
need to allocate sufficient resources to manage these tax changes.
With reporting under FATCA beginning this year, accounts in
existence from 2016 being shared under CRS and the BEPS project
due to finally report this year there will be further changes to the
Gulf tax system.
Ian Anderson is a Senior Consultant in our
Doha office with responsibility for taxation
services across the Middle East. Previously he
spent 8 years as Director of Tax for the Qatar
Financial Centre (QFC) where he was
responsible for developing the new tax regime
for the Centre. Prior to that he was Director of
Tax and Treasury at UK FTSE250 company,
MyTravel, with responsibility for worldwide
tax planning and management. Ian has
particular experience in international tax
planning, asset financing including cross
border leasing and inbound/outbound
investment to and from the Gulf.
E: ian.anderson@pinsentmasons.com
T: +974 442 69210
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PM-Tax | Recent Articles
Title (continued)
Recent pensions VAT developments
by Darren Mellor-Clark
This article discusses the recent changes to HMRC policy on VAT reclaims for pension funds and
recommends some action points for schemes and employers.
HMRC has recently revised its policy about the VAT treatment of
pension scheme management services. This follows a number of
European Court cases about whether management services
provided to pension schemes are VAT-exempt and, if not, who can
recover the VAT incurred on those costs. Both defined benefit (DB)
and defined contribution (DC) schemes are affected. There is a
transitional period, but only until 31 December 2015. Advice
should be taken in good time before the end of the year to
optimise the VAT position going forward.
•An employer may be entitled to recover VAT paid on investment
management costs in respect of its DB scheme, as there is a
direct and immediate link between those costs and the
employer’s business (the PPG case).
HMRC’s previous policy was not in line with the principles set out
in those cases. Accordingly, HMRC has issued new guidance.
When are investment management and administration
services VAT-exempt?
What is the impact of recent European VAT case law?
HMRC acknowledges that where a pension scheme is a SIF, certain
services supplied to it will be VAT-exempt. HMRC accepts that
most occupational DC schemes will qualify as a SIF, and so may
most personal pensions where services are provided at the fund
level (subject to an apparent carve-out for SIPPS).
HMRC previously allowed employers to deduct VAT incurred in
relation to the administration of an occupational pension scheme
on the basis that these costs were employer overheads. By contrast
it considered that investment management costs related solely to
scheme activities were deductible by the scheme but not by the
employer. Where fund managers supply both general scheme
administration and investment management services, HMRC
allowed employers to assume 30% of the fees related to
administration and to recover VAT paid on those fees. 70% of the
fees were assumed to relate to investment management, and the
VAT on that 70% could potentially only be recovered by the
trustee (if VAT registered). HMRC accepted that insurance
contract-based DC pension fund management services qualified
for VAT exemption.
HMRC confirms that to qualify as a SIF, a scheme must meet all
the following criteria:
•the funds are solely funded (directly or indirectly) by members;
•the members bear the investment risk, which is spread over a
range of securities; and
•the fund contains the pooled contributions of several members.
Only investment management and administration services that are
integral (ie specific and essential) to the operation of a SIF qualify
for VAT exemption. This includes, for example, the services of
administering pension accounts, services relating to system
maintenance and development, services relating to payments into
and out of the scheme, portfolio management, valuations and
pricing and accounting.
Several European cases have provided further clarity as to the VAT
status of supplies connected with pension schemes:
•An occupational DC scheme may qualify as a “special investment
fund” (SIF) – so the management services provided to them
(including both investment management and administration
services) are VAT-exempt. This is in contrast to HMRC’s previous
approach whereby VAT exemption was granted on the basis of a
supply of insurance (the ATP case).
•A DB scheme is not a VAT-exempt SIF, and nor is a common
investment fund in which the assets of several DB schemes are
pooled – so VAT is chargeable on management services provided
in connection with DB schemes (the Wheels case).
HMRC has confirmed that UK legislation will be amended in due
course to reflect the ATP judgment but, in the meantime, schemes
can rely on EU law. HMRC is considering whether the ATP judgment
may have wider implications and may issue further guidance.
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PM-Tax | Recent Articles
Recent pensions VAT developments (continued)
application of EU law has resulted in under-recovery or
overpayment of VAT by a taxpayer, retrospective claims to correct
that position may be available.
When may employers deduct input VAT on pension fund
management costs?
HMRC’s policy following the PPG case states that the employer may
recover input tax on fund management costs where the services in
question are provided to the employer. HMRC acknowledges that
this is a highly fact-sensitive question that will depend on all the
circumstances. However, it does require the employer to be a party
to the contract for those services and to have paid for them directly.
HMRC has now issued some further guidance:
Claims largely divide into two categories, namely claims for
exemption of management services and claims for recovery of VAT
incurred (input tax).
Exemption claims are likely to be brought on the basis that there
are funds or vehicles which now qualify as SIFs, or services which
now fall within the definition of exempt “management” activities.
Such claims are most likely to be brought by the managers,
although there are a number of discrete remedies which may be
pursued directly by the funds. There is unlikely to be much merit in
such claims for DB schemes as they will not be SIFs. Many
(insurance contract-based) DC schemes already benefit from
exemption, but they may wish to consider whether all aspects of
“management” are having the exemption applied appropriately.
•HMRC will no longer differentiate between administration and
investment management costs. VAT can in theory be reclaimed
by the employer on both.
•Recognising that it is a statutory requirement that trustees
(rather than the employer) contract for certain services and have
specific obligations, HMRC has accepted that tripartite contracts
can be used to demonstrate that the employer is the recipient of
DB pension fund management services. The tripartite contract
must satisfy certain minimum requirements (for example, the
employer’s liability for payment, legal redress, performance
reporting and termination).
As regards input tax for DB schemes, retrospective claims will be
accepted by HMRC where the criteria set out in its guidance as to
the application of PPG are met. We consider that HMRC’s policy on
this issue does not reflect the principles set out by the European
Court in PPG. HMRC’s policy is unduly restrictive and does not
allow retrospective recovery in circumstances where we consider
that proper application of PPG would do so. There is, therefore,
potential benefit in bringing a retrospective claim even where the
strict requirements set out in HMRC’s policy are not met.
•For an employer to be able to deduct VAT, it will need a valid VAT
invoice for the full cost of the supply. It needs to pay the service
provider directly for the full cost of the services. HMRC does not
accept that an equivalent increase in the employer’s
contributions to the fund, or any payment made by or through
the fund, constitutes payment by the employer.
•Where there is a single supply of investment management and
administration services, the pension scheme and the employer
can continue to rely on the 70/30 split but only for a transitional
period until 31 December 2015.
When considering these claims, parties should be mindful of the
four year limitation period on VAT claims and the resulting value in
bringing a claim at the earliest opportunity. We can advise further
on these issues.
HMRC’s latest guidance only covers pension fund management
services (investment management and administration) in respect
of DB schemes. It is considering the impact of the PPG decision on:
What steps should schemes take now?
Trustees and employers should review their investment
management and administration service contracts now to identify
those supplies on which VAT is charged. (In some instances VAT will
not usually be charged – for example where trustees subscribe for
shares or units under pooled funds.)
•other services provided to the scheme (eg legal, actuarial and
accounting services);
•other types of pension scheme (eg DC or hybrid schemes);
•VAT groups that include a corporate trustee and a sponsoring
employer; and
•trustees who charge employers to run their pension schemes.
Schemes should also review invoicing arrangements. They should
consider having separate invoices for DB and DC arrangements, as
HMRC accepts most occupational DC schemes have historically
been VAT-exempt.
HMRC intends to provide further guidance in the summer which
may clarify the VAT treatment for these situations.
Is there scope to submit retrospective claims for VAT refunds?
For the administration and investment management costs of DB
schemes, the best way to enable VAT recovery in the hands of the
employer (which will typically result in a higher level of VAT
recovery than that available to the scheme) may be to have a
tripartite contract between the supplier, trustee and employer.
These developments are not changes to VAT law but clarifications
as to the existing law. These principles therefore have retrospective
effect and where it is now apparent that HMRC’s previous incorrect
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PM-Tax | Wednesday 27 May 2015
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PM-Tax | Recent Articles
Recent pensions VAT developments (continued)
HMRC’s guidance sets out minimum requirements for tripartite
contracts, and each party will need to consider carefully the
implications of moving to such agreements. We can help not just
with those negotiations but also the drafting of tripartite
contracts. We can ensure that the amendments meet HMRC
criteria as well as statutory and trust law requirements. Although
31 December may seem a long way off, it can take time to arrange
matters with the different parties, so we advise against any delay.
Finally, there may be scope to submit retrospective claims for
VAT refunds.
Darren Mellor-Clark is a Partner (Non-Lawyer)
in our indirect tax advisory practice and advises
clients with regard to key business issues
especially within the financial services,
commodities and telecoms sectors. In
particular he has advised extensively on the
indirect tax implications arising from regulatory
and commercial change within the FS sector,
for example: Recovery and Resolution Planning;
Independent Commission on Banking; UCITS IV;
and the Retail Distribution Review.
E: darren.mellor-clark@pinsentmasons.com
T: +44 (0)20 7054 2743
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PM-Tax | Wednesday 27 May 2015
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PM-Tax |PM-Tax
Our Comment
| Cases
Title (continued)
Cases
Carver v HMRC [2015] UKFTT 0168 (TC)
A sale of part of the syndicate capacity of a Lloyds Name did not qualify for entrepreneurs’ relief.
Mr Carver had claimed entrepreneurs’ relief (ER) in respect of the
disposal of syndicate capacity in one of the Lloyd’s syndicates in
which he participated. HMRC refused the claim.
The FTT said that a Name at Lloyd’s carries on a single trade,
however many or few syndicates he or she is involved in. The trade
carried on is that of underwriting the risks assumed by the
syndicate’s Managing Agent, so that capacity to participate in the
syndicate’s business is not itself the trade, but a means by which
the Name is enabled to carry it on in conjunction with the other
members of the syndicate. The FTT said it was partly analogous to
buying into the goodwill of a business.
Lloyds Names underwrite risks through syndicates. In order to join
a syndicate, members must purchase ‘syndicate capacity’.
Syndicate capacity is the extent to which a syndicate may
underwrite insurance business and is equal to the total of the
premium limits of all the syndicate’s members. A member’s
premium limit is directly related to the capital they put at risk. The
capital is not actually used in the syndicate’s business, but is held
by Lloyd’s in a trust from which Lloyd’s will pay insurance claims if
the syndicate makes a loss and a member does not pay his or her
share of the liabilities.
The FTT said that capacity was therefore an asset of the business
and was not the trade or business itself. It said that capacity could
not by itself amount to a viable section of a composite trade which
would still be recognisable as a trade if separated from the
composite whole (as per Lord Walker in Maco Door and Window
Hardware (UK) Ltd v HMRC). The FTT said it was not within its
remit to consider whether the legislation produced a fair result, so
refused to consider the taxpayer’s final argument.
Mr Carver said the disposal of his capacity was a disposal of “part
of a business” within s.169I(2)(a)TCGA. He argued in the
alternative that his activity in each syndicate in which he
participated was a separate business so that the sale of his capacity
in one syndicate represented the sale of a business. Mr Carver also
argued that since HMRC accepts that the final sale of a Name’s
capacity at Lloyds qualifies for ER, it must follow that the sale of
any part before then also qualifies.
Comment
The effect of this case is that entrepreneurs’ relief is available when
an individual disposes of syndicate share on ceasing to be a Lloyds
Name altogether, but is not available if a Name disposes of some
capacity but continues to be a syndicate member
Read the decision
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PM-Tax | Cases
Cases (continued)
French Connection Limited v HMRC [2015] UKFTT 0173 (TC)
VAT payable on clothing provided to fashion store staff free of charge to wear when working.
French Connection (FC) provided staff members in their fashion
stores with a clothing allowance enabling them to choose items
from FC’s stock, which they were then required to wear when
working. If a staff member left there was no requirement to return
the clothing, but in some situations the staff member’s pay would
be reduced by a percentage of the clothing allowance used. HMRC
argued that where clothing was supplied to staff for no
consideration, this was a supply of goods for VAT purposes and
therefore output tax was due in respect of that supply.
The FTT said the policy behind Article 16 was to provide a VAT exit
charge when business assets were taken out of the business. The
purpose was to neutralise the input tax recovery on the goods and
to prevent the taxable person from benefiting from the input tax
recovery but escaping a charge to VAT when the goods are removed
from the business. The FTT said there was no policy reason why a
charge should not arise when goods were provided free of charge to
employees even if for the purposes of the business.
The FTT said that Article 16 provided for three stand alone
situations so there was no justification for reading the part of
Article 16 relating to the disposal free of charge of goods forming
part of the taxable person’s business assets, as only applying where
the disposal was other than for business purposes. It said that para
5 Sch 4 VATA 1994 was consistent with Article 16.
FC argued that it provided uniform clothing to its staff for the
purposes of its business. It relied on the terms of Article 16 PVD
and argued that imputation of consideration applied only where
the transaction was for purposes other than those of FC’s business.
It also argued that if there was a taxable supply of the clothing, the
contractual conditions of use of the clothing and the possible
retrospective charge if a member of staff left, meant that at the
time of supply the value of the goods supplied was unascertainable
or de minimis.
The FTT said that the question of whether the clothing constituted
a uniform was of no relevance to whether its supply resulted in a
VAT liability. The valuation of the clothing was to be based on cost
price and should not take into account the fact that the staff
member may leave and have part of the cost recouped from his or
her salary.
Para 5(1) Sch 4 VATA 1994 provides that “where goods forming
part of the assets of a business are transferred or disposed of by or
under the directions of the person carrying on the business so as no
longer to form part of those assets, whether or not for a
consideration, that is a supply by him of goods”.
FC’s appeal was therefore dismissed.
Comment
Article 16 says “The application by a taxable person of goods forming
part of his business assets for his private use or for that of his staff, or
their disposal free of charge or, more generally, their application for
purposes other than those of his business, shall be treated as a supply
of goods for consideration, where the VAT on those goods or the
component parts thereof was wholly or partly deductible.”
The case emphasises that a VAT liability can arise when a business
is supplying assets other than for consideration and wholly for
business purposes.
Read the decision
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PM-Tax | Cases
Cases (continued)
Next Brand Ltd v HMRC [2015] UKFTT 0175 (TC)
Double tax relief was not available for a payment which although taking the form of a dividend was
in substance the repayment of a loan.
Next Brand Limited (NBL) claimed double taxation relief (DTR) for
underlying tax of around £45 million, which would eliminate
almost all of the UK tax otherwise payable on a dividend of about
£106.5 million which NBL received from its Hong Kong subsidiaries.
The judge said that in order for DTR to be available it was not
enough for a payment to merely have the form of a dividend.
Section 799 says “the tax to be taken into account … shall be so
much of the foreign tax borne on the relevant profits by the body
corporate paying the dividend as (a) is properly attributable to the
proportion of the relevant profits represented by the dividend ….”.
He said it must be shown that the dividend was derived from the
profits and in this case the accounting treatment of the transaction
as the repayment of a debt undermined the proposition that there
was such a derivation.
Ordinarily tax would be chargeable in the UK on the dividend under
Schedule D Case V. However, NBL claimed that the effect of
arrangements into which it and other members of its group
entered meant that DTR applied. The arrangements involved
various loans, declarations of dividends and issues and transfers of
irredeemable preference shares.
He said “It does not seem to me… that it is permissible for NBL to
say that the facts that the transaction was in substance the
repayment of a debt, was accounted for accordingly by both payer
and recipient, and had consequential effects in the presentation of
their respective financial standing, should all be disregarded
because the payment had the form of a dividend.”
HMRC rejected the claim on the ground that the arrangements
amounted to a series of artificial steps by which NBL sought to
inflate the value of the DTR to which it was properly entitled.
HMRC argued that one of the steps, said to be the payment of a
dividend, was in reality the repayment of a loan.
Comment
In the FTT Judge Colin Bishopp held that DTR was not available and
dismissed NBL’s appeal.
This is another victory for HMRC over a complex scheme. Those
who implemented similar schemes, most of which date back 8 to
10 years, should now expect HMRC to issue accelerated payment
notices, and will have to consider whether continuing to fight on is
worthwhile.
Read the decision
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PM-Tax | Cases
Cases (continued)
Meena Seddon & Others v HMRC [2015] UKFTT 0140 (TC)
Scrip dividends are capital receipts in the hands of trustees for inheritance tax purposes. In the case
of conflicting UT and High Court decisions, the FTT should be bound by the latest decision – ie the
UT one.
A settlement originally owned five £1 shares to the value of
£200,000. The trustees received a scrip dividend of preference
shares in early 2000 and within two days sold the preference
shares for £1.3 million. A distribution from the trust was not made
until 2009, a few days before the first tenth year anniversary of the
commencement of the settlement. The trustees argued that as the
scrip dividends were income and had not been accumulated to
capital, they should not be taken into account in calculating the
exit charge to inheritance tax that applies on the distribution of
capital from a trust.
The trustees next attempted to argue that the scrip dividends were
not “relevant property” for the purposes of s.68(5)(c), IHTA 1984
and as such would not be subject to the effective 6% rate every
ten years. The trustees’ argument was that only property that
became part of a settlement as a result of a chargeable transfer is
property for the purposes of that section and that this is the case
because s.68 is a deeming provision.
The FTT dismissed the trustees’ argument. First it stated that s.68
is not a deeming provision as it is couched in hypothetical, rather
than deeming, terms. Secondly it found there to be “no basis to
read into section 68(5)(c) a requirement that only property which
became comprised in the settlement as a result of a chargeable
transfer should be taken into account. Essentially, if that was what
Parliament had intended that is what Parliament would have said.”
The value of the scrip dividend was therefore part of the
settlement for the purposes of determining IHT.
As a matter of general trust law (and confirmed in HMRC
Statement of Practice 6/86), undistributed and unaccumulated
income of a discretionary trust is not a taxable trust asset and as
such is not be charged to an exit charge. However, there are, as the
FTT noted, conflicting decisions on whether scrip dividends amount
to income or capital.
HMRC pointed to the Gilchrist decision of the UT, which found that
scrip dividends were capital and the taxpayer submitted that the
High Court decision finding the other way of Pierce v Wood was
binding on the FTT in preference to the UT decision.
Finally the FTT found that the trustees had not proved that the scrip
dividends were not accumulated to capital before date of distribution.
The trustees’ appeal claiming that no inheritance tax was due on
this distribution was therefore rejected.
The FTT noted that the UT is not bound by High Court decisions,
making the courts equal courts of first instance. As such, the FTT
said that it must follow the later decision of two conflicting first
instance judgments, that being the UT’s Gilchrist decision. The
result of applying Gilchrist as advanced by HMRC meant that the
scrip dividends were capital in the hands of the trustees.
Comment
In the face of conflicting decisions on whether a scrip dividend is
income or capital, it is helpful that this case has considered which
decision is binding on the FTT. However, the confusion in this area
will not finally be resolved until the matter is considered in the
Court of Appeal.
Read the decision
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PM-Tax | Wednesday 27 May 2015
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PM-Tax | Events
Events
The Great Tax Debate: “This House Believes that
Tax Planning is Dead – and Buried”
Crossing the Line – when ‘avoidance’ escalates to a
criminal investigation
Proposing the Motion: Kevin Prosser QC
Guest Speaker: Jonathan Fisher QC
Opposing the Motion: Roderick Cordara QC
In this Pinsent Masons Business Network seminar, we follow Mr
Ramsay, a client who purchased a professionally marketed
avoidance scheme approved by a QC, and who has now become
the subject of a criminal investigation by HMRC.
We are delighted to offer you the opportunity to hear two of the
UK’s leading Tax Silks battle out the issue which exercises every tax
practitioner. We do hope that you will join us – we encourage you
to register early to attend this event as capacity is limited and we
anticipate a very high level of interest.
The seminar will be led by Jonathan Fisher QC and senior advisers
from Pinsent Masons, including Fiona Fernie, Partner and Head of
Tax Investigations. We will work through the initial criminal
investigation rationale at HMRC; explore the difference between
suspicion of ‘civil’ and criminal fraud; initial criminal investigation
procedures – and the likelihood of bringing the case back into the
civil regime and the impact of fraud admissions on discovery
provisions. We will also look at what an adviser needs to think
about when a client is under criminal investigation, both to
represent his client effectively and to protect himself.
The evening’s stimulating debate will be followed by a drinks
reception, with drinks and canapés hosted by partners from the
Pinsent Masons Tax Team.
Date: Monday 8 June 2015
Registration &
refreshments:4.30pm
Welcome from
James Bullock,
Partner, Chair:
5.00pm
Thursday 4 June 2015
Timings:
3.30pm to 4.00pm – Registration
4.00pm to 7.00pm – Seminar
Drinks reception:7.00pm
Debate start:5.15pm
Venue:
Debate concludes
followed by
drinks reception: 6.30pm approx
Venue: Date:
Pinsent Masons LLP, 30 Crown Place, London
EC2A 4ES
We do hope that you will stay for the drinks reception, hosted by
the Pinsent Masons Tax Team, and enjoy spectacular views over the
City over drinks and canapés whilst networking with peers. For
catering purposes, please indicate when replying whether you plan
to stay for the reception.
Pinsent Masons LLP, 30 Crown Place, London
EC2A 4ES
To attend or for further information please contact Marina Dell.
If you would like to attend please contact Marina Dell.
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PM-Tax | Events
Share Plans Studies Group
The Share Plans Studies Group provides companies that operate
share plans with an opportunity to swap experiences on recent
developments. Pinsent Masons hosts the meetings and provides
attendees with information in the form of updates and/or practical
experience as the context for a wider discussion. It is not a “selling”
meeting. It is a round table discussion group intended to facilitate
an exchange of views and the dissemination of ideas and best
practice.
Attendance is free of charge and these events qualify for 2.5 hours
towards the CPD requirements of a number of professional bodies.
Click here for the full agenda and timings.
The dates and locations for the June sessions are:
Date
Location
Wednesday 17 June 2015
30 Crown Place, London EC2A 4ES
Monday 22 June 2015
3 Colmore Circus, Birmingham,
B4 6BH
Thursday 25 June 2015
1 Park Row, Leeds, LS1 5AB
Monday 29 June 2015
3 Hardman Square, Manchester,
M3
If you are responsible for operating share plans in your organisation
and would be interested in attending one of the sessions please
contact Lisa Brook. Please note that these sessions are not
intended for professional advisers, remuneration consultants, share
plans administrators or trustees.
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PM-Tax | Wednesday 27 May 2015
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PM-Tax | People
People
Pinsent Masons wins Taxation’s Tax Team in a Law Firm award
for 2015
We are delighted to announce that in Taxation magazine’s 2015 awards, Pinsent
Masons won the award for best tax team in a law firm. The Taxation awards
launched in 2001 and celebrate the success of teams and individuals in all areas of
UK tax.
The awards ceremony took place at the Park Lane Hilton, London on 21 May.
The Tax Team in a Law Firm award honours tax teams which have demonstrated
innovative work which adds value to clients as well as team work and proven
performance in excess of expectations.
Pinsent Masons fought off stiff competition from Baker & McKenzie, Eversheds,
Joseph Hage Aaronson and Olswang to secure the accolade.
Commenting on the win, Jason Collins head of tax, said:
“We are really proud to win this award. Pinsent Masons (uniquely) has a large
multidisciplinary tax team, with top tax lawyers working alongside chartered tax
advisers and former tax policy officers. Our clients value our advice on the full
spectrum of contentious and advisory matters and this award recognises the excellence of our tax practice”.
The award category for best tax team in a law firm was launched in 2006. Before the merger with Pinsent Masons, the McGrigors tax
team won the award in both 2006 and 2007. In 2011 the team won “Best Tax Investigations Team” and also “Best VAT Team” in the
Taxation awards.
Tell us what you think
We welcome comments on the newsletter, and suggestions for future content.
Please send any comments, queries or suggestions to: catherine.robins@pinsentmasons.com
We tweet regularly on tax developments. Follow us at:
@PM_Tax
PM-Tax | Wednesday 27 May 2015
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This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the
appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the
LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office:
30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP, its subsidiaries and any affiliates which it or its partners operate as separate
businesses for regulatory or other reasons. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those subsidiaries or affiliates as the context requires.
© Pinsent Masons LLP 2015.
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