PM-Tax
Budget Special Edition
Thursday 20 March 2014
News and Views from the Pinsent Masons Tax team
In this Issue
Our Comment on the Budget
• Introduction and overview by James Bullock
• Tax avoidance and disputes by Jason Collins
• Corporate tax by Eloise Walker
• Base Erosion and Profit Shifting (BEPS) by Heather Self
• Property tax by John Christian
• High net worth individuals by Ray McCann
• Indirect taxes by Darren Mellor-Clark
• Advanced Manufacturing and Technology by Ian Hyde
• Energy by Tom Cartwright
Recent Articles
• VAT, public bodies and outsourcing by Martin Salisbury of Mitie Group PLC and Ian Hyde of Pinsent Masons
• The Secret Hotels2 case by Stuart Walsh and Piermario Porcheddu
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Our perspective on recent cases
Procedure
• Universal Enterprises (EU) Limited and others v HMRC [2014] UKUT B4 (TCC)
Substance
• Esporta Limited v HMRC [2014] EWCA Civ 155
•D
MWSHNZ Ltd (in members’ voluntary liquidation) v HMRC [2014] UKUT 0098 (TCC)
• Paul Daniel v Revenue & Customs [2014] UKFTT 173 (TC)
• Andrew Colin Perrin v Revenue & Customs [2014] UKFTT 223 (TC)
• Shop Direct Group v HMRC [2014] EWCA Civ 255
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© Pinsent Masons LLP 2014
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PM-Tax | Our Comment
Introduction and overview
by James Bullock
It was hailed (by the Chancellor) as “a Budget for Makers,
Doers and Savers”. It came across to us, in reality, as a budget
of a Coalition Government that is nearing the end of its term
of office. And the fact that it is a Coalition means that it is
inevitably difficult to paint a picture of what life might be like
beyond the General Election in 2015 – save, of course, for the
deficit reduction strategy, of which the Chancellor is, with some
justification, proud.
concerns in this regard, which we believe will lead to taxpayer
challenges. Interestingly, HMRC openly acknowledges that it is
anticipating challenge, promising, in essence, whatever it takes
in terms of additional resource – to meet such challenges “head
on”. It struck us as the fiscal equivalent of two people electing to
take an argument in a pub: “Outside!”
Fundamentally, we think that from this point onwards there
will be little new of significant interest this side of the General
Election. The nature of the Coalition means that it will be
difficult for the Government, as such, to set out its plans for the
next five years, so the party conference season in the autumn
will be potentially more interesting from a tax policy perspective
than the next Autumn statement – and certainly more so than
the Budget in 2015.
Overall, however, the picture was more about tinkering around
the edges – or confirming things that we already knew (or were
pretty certain) were coming. One alarming measure, outlined
by Eloise Walker in these pages, uses a very large anti-avoidance
hammer to crack a relatively small nut relating to the transfer of
corporate profits. There is a dramatic extension of the “Annual Tax
to Enveloped Dwellings”, reducing the threshold from properties
valued at £2million to £500,000. This will have a dramatic impact
on non-resident investors buying multiple smaller properties in
the UK, as opposed to the one “mansion”.
We hope that you enjoy this Budget edition of PM-Tax, and look
forward to continue to working with many of you over the next year.
It is good to see some measures in relation to Indirect Tax –
notably in relation to extending the reverse charge to supplies of
power and gas in a business-to-business context (with a view to
preventing supply chain fraud). And there is good news for fans
of bingo! Apparently the MPs respectively for Harlow (Essex)
and Waveney (Suffolk) had been behind this measure – so one
presumes that there must be many bingo fans in those areas. Good
news also for the Scottish whisky and West Country cider makers –
and for the brewing industry.
James Bullock is Head of the Litigation and
Compliance Group. He is one of the UK’s
leading tax practitioners and has been
recognised as such in the leading legal
directories for many years. James has over
nineteen years of experience advising in
relation to large and complex disputes with
HMRC for large corporates and high net worth
individuals, including in particular leading
negotiations and handling tax litigation at all
levels from the Tax Tribunal to the Supreme
Court and European Court of Justice.
On the Energy front, following a history of somewhat “mixed
messages” from the Coalition Government, we now have the
promise of a wholesale review of the tax regime for the UK
Continental shelf.
E: james.bullock@pinsentmasons.com
T: +44 (0)20 7054 2726
The wholesale reform of pensions is an interesting
development, which could be transformational (but again has
been long anticipated). On the other hand, the “Budget for Makers,
Doers and Savers” surprisingly had nothing to say about Share
Plans. However, we are expecting some measures in the Finance
Bill, so may yet be pleasantly surprised.
Perhaps the most significant announcement, although it was one
we knew was coming, was the confirmation that the accelerated
payment regime will apply to arrangements subject to DOTAS –
or which fall foul of the GAAR advisory panel – even though they
have not been litigated or even follow the facts of a case where
the Courts have found for HMRC. Jason Collins explains our
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PM-Tax | Our Comment
Tax avoidance and disputes
by Jason Collins
Despite uniform expressions of concern from a range of
stakeholders, HMRC is pushing ahead with its “accelerated
payment” plan for users of pre-existing tax avoidance schemes
that fall under DOTAS, or which HMRC say have been defeated by
a test case. It will apply to all cases where there is an open enquiry
or open appeal.
One has to ask whether HMRC is damaging its own reputation
with these measures. The zeal the Coalition is showing
for driving avoidance out of the system will confuse – and
potentially deter – genuine investors from accessing legitimate
“tax avoidance” opportunities, as they become ever more wary
of anything marketed to them as having a tax advantage. This
might include some schemes which the Government wants to
promote, such as those for investments in Social Enterprise,
Theatres and the Seed EIS. There may come a day when HMRC
loses the ability to use tax reliefs as an economic lever to
influence investment in the economy.
Under this unprecedented measure, HMRC estimates it will collect
£5.1bn of cash from 33,000 individuals with a mean gross income of
£262,000 (compared to £29,000 for the wider income tax paying
population), 85% of whom have multiple sources of income, with a
greater bias towards non-employment (including self-employment)
income than the average. In other words, people rich enough to have
substantial investment income. 10,000 notices will also be issued to
corporates to collect £2.1bn. Although one can understand HMRC’s
operational need for “failure notices”, the DOTAS notices may be
of dubious legality and HMRC has committed extra resources in
anticipation of legal challenges.
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”. Jason also advises on the extent to
which HMRC can seek or share information
with other UK and foreign authorities, and
advises financial institutions and individuals on
the application of FATCA and other forms of
automatic exchange of information
agreements, with a particular focus on trusts,
investment companies and funds.
The payments are “on account” of a potential tax liability and the
users are free to challenge HMRC to get the money back. However,
HMRC’s calculation is that many will give up the ghost once they
have paid. Those that are affected will need to prepare for the
demands, which will be issued over a two-year timeframe from
July this year and will allow 90 days to comply, or a further 30 days
if a request for reconsideration is made and fails. Interestingly,
HMRC has previously disclosed that 65,000 individuals and small
businesses are currently involved in avoidance disputes, so 22,000
of that population are unaffected by these measures.
HMRC is also to be given the power to take tax debts over £1,000
directly from bank accounts. No data have been supplied, but
presumably those who fail to pay their debts are more likely to be
on lower incomes. But will HMRC also use this “snatching” power
against the 43,000 who receive an accelerated payment demand?
E: jason.collins@pinsentmasons.com
T: +44 (0)20 7054 2727
The requirement to pay tax up front will also apply to new,
disclosable tax avoidance schemes or those which are counteracted
via the GAAR. This will certainly “kill” a lot of the demand for
marketed schemes. However, it is also likely to increase disputes
about what is disclosable and send promoters offshore. Where
the promoter is offshore, the obligation to disclose falls on the
user – but the real issue is that the promoter will not be subject
to a penalty if they wrongly advise their customers not to disclose
a scheme. Although it has been confirmed that HMRC will add
beefed-up powers to go after “high risk” promoters, the upfront
payment measure may drive avoidance underground and reduce
the information HMRC has about new forms of tax avoidance.
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PM-Tax | Our Comment
Corporate tax: how to crack a small nut
with a really big hammer
by Eloise Walker
Those who read the small print in the Autumn Statement 2013
may remember tucked away a new anti-avoidance measure aimed
at schemes where a derivative contract (a total return swap, in
effect) was being used to allow a UK company to claim deductions
for profit-linked payments to another group company in a tax
haven. This, essentially, strips profits from the UK tax net.
It is yet another – in this case quite extreme – example of HMRC’s
growing trend to put out very widely drawn legislation and then
expect us all to rely on guidance to fall outside it. That would be
fine, if we could be sure that HMRC won’t withdraw that guidance
when they feel like it – just ask Mr Gaines-Cooper.
Perhaps conscious that the widely drawn rule may cause alarm, the
guidance in the technical note has a few examples. “Fear not,” they
seem to say, “if you don’t have an anti-avoidance purpose you’ve
got nothing to worry about.” If purpose is really the key point here
why aren’t they relying on the GAAR, or even the old paragraph 23
schedule 26 FA 2002 (still on the books as section 690 CTA 2009)?
Probably, only those who were involved in the schemes paid much
attention to the proposed new section 695A CTA 2009 to be
introduced in the Finance Bill 2014. Well, we should all be paying
attention now.
In a new measure announced with effect from Budget day, (to
insert a new section 1305A CTA 2009 before section 695A is even
enacted), HMRC have decided that, since they have heard of new
avoidance schemes being worked up to get around section 695A,
they are going to hit them hard. All very admirable, except in the
way HMRC have gone about it.
As drafted, conscientious tax managers may need to think
about going through a compliance exercise on their intra-group
arrangements to be happy that nothing they’ve done is likely to
fall foul of this. If one felt suspicious, one might even think this a
concealed attempt to have an extra weapon for HMRC’s arsenal
in the BEPS debate. In this regard, I leave you with a thought to
consider: if company B in Luxembourg agrees to provide services
to company A in the UK, and company B (taxed in the EU at lower
rates than A) gets paid a hefty price for its assistance, is company A
definitively inside or outside this new rule? Amazon, beware.
What the new proposed section 1305A says is that if:
• two companies in the same group (A and B)
• a re party to any arrangements (widely defined to include just
about anything, and they do not have to be parties at the same
time either)
• the arrangements effectively result in A directly or indirectly
paying to B a significant part of A’s business profits or a fellow
group member’s profits (the so called “profit transfer”), and
• one of the main purposes of the arrangements is to secure a tax
advantage for anyone involving the profit transfer,
Eloise Walker is a Partner and Head of
International Tax specialising in corporate tax,
structured and asset finance and investment
funds. Eloise’s focus is on advising corporate and
financial institutions on UK and cross-border
acquisitions and re-constructions, corporate
finance, joint ventures and tax structuring for
offshore funds. Her areas of expertise also
include structured leasing transactions, where
she enjoys finding commercial solutions to the
challenges facing the players in today’s market.
then A’s corporation tax profits must be re-calculated as if the
arrangements had not occurred.
Note that the measure only works one way and (I imagine for EU
law reasons) there is no reference to movement of funds crossborder. If A and B are UK companies and A suffers an upwards
adjustment, B does not get a corresponding allowance.
E: eloise.walker@pinsentmasons.com
T: +44 (0)20 7490 6169
Clearly this new rule will help HMRC to put a stop to these
particular schemes, and good thing too, but at what cost? Some
adverse implications of this new rule spring to mind.
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PM-Tax | Our Comment
Base Erosion and Profit Shifting
by Heather Self
The UK’s view on actions on CFC rules, interest deduction and
harmful tax practices can perhaps be summarised as “smug”: the
UK does not see a need for further major change. However, there is
a reference to wanting to see the OECD’s views on “best practice”
in relation to interest deductibility, which could be a sign that the
UK’s position is not as firm as business would wish.
The Government has shown its clear support for the work
of the OECD in tackling international tax avoidance – the
BEPS (Base Erosion and Profit Shifting) project – and has now
published a detailed summary of its priorities.
Sensibly, the UK has held back from introducing unilateral
measures, recognising that this is “an international issue that will
require a comprehensive and coordinated approach.” But it is clear
that major changes to international tax rules are in the pipeline,
including measures on further transparency (country-by-country
reporting) and dealing with the problem of complex structures
which escape tax altogether.
Finally, and crucially, there needs to be a strong focus on dispute
resolution. It seems likely that transparency on transfer pricing will
lead to many more tax audits, with a risk of double taxation. The
UK supports the principle of binding arbitration – but much more
work needs to be done to make this a practical reality.
Although digital businesses such as Amazon, Google and Apple
have been highlighted as presenting particular challenges, it would
be counter-productive to bring in special rules for this sector. That
would simply move the problem to one of definition: is a particular
business in the “digital economy” or not? Instead, there are likely
to be changes to the basic rules on permanent establishments and
transfer pricing rules. In particular, the artificial fragmentation of
permanent establishment status is likely to be stopped.
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.
Heather is a CEDR accredited mediator.
Hybrid mismatch arrangements typically result in a tax deduction
in one country with no matching income receipt in another.
It is clear that the will to defeat these arrangements is there,
with proposals to deny a deduction or to tax the receipt in such
arrangements. There is still work to do to ensure that the rules are
workable, and it is good to see the UK acknowledge that hybrid
instruments are sometimes required for regulatory purposes,
particularly in the banking and insurance sectors.
E: heather.self@pinsentmasons.com
T: +44 (0)161 662 8066
Similarly, there is clear agreement within the OECD that Treaties
should not be used to facilitate tax avoidance: the UK already
has anti-abuse rules in some of its main Treaties. However, the
possible introduction of a “GLOB” (General Limitation of Benefits)
rule could impose significant compliance burdens, in checking that
ordinary commercial transactions do not fall within its scope.
There has been significant progress on the proposals for countryby-country reporting and transfer pricing documentation over
recent weeks, with the OECD on target to deliver firm proposals by
September 2014. The UK supports the initiative, but stresses that it
is intended to be a risk assessment measure for tax authorities and
the administrative demands on business should be minimised.
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PM-Tax | Our Comment
Property tax
by John Christian
As expected, the Budget made changes to the SDLT regime for
residential property. But these were not the mooted changes to
the banding of rates.
The Business Premises Renovation Allowance (BPRA) rules will
be changed, largely in line with the proposals announced in
December 2013. Further changes announced yesterday extend
qualifying expenditure on plant and machinery to include
additional (unspecified as yet) items of plant as well as integral
features announced in December 2013. Expenditure will be
excluded where State Aid has or will be received, as provided
under the current rules. Where expenditure is paid in advance,
the works funded by the expenditure must be completed within
36 months (an extension from the 24 month period announced
in December 2013). The reduction to five years (from seven years)
of the period in which balancing adjustments can be triggered is
also confirmed. The BPRA regime has now settled and investors
and developers should be able to proceed with more certainty.
The change is instead a significant extension to the rules applying
to enveloped “high value” residential properties. The threshold
value on which the 15% SDLT rate applying to enveloped
residential properties is imposed will be reduced from £2m to
£500,000. The new threshold applies to acquisitions by nonnatural persons on or after 20 March. It is unlikely that many
enveloping structures are in place for individual acquisitions at
these comparatively low values, and the change is likely to be
aimed at investors building up portfolios of assets below the £2m
individual lot size. The exemptions for acquisitions for property
rental businesses will remain.
The Chancellor also announced a consultation on SDLT relief on
“seeding” Property Authorised Investment Funds (PAIFs), and
the SDLT treatment of co-ownership authorised contractual
collective investment schemes. People have been lobbying for
the PAIF change for some time, and SDLT relief will help to deliver
more PAIF conversions and new launches.
There is a related change to the Annual Tax on Enveloped
Dwellings (ATED), to reduce the threshold from £2m to £500,000
in stages. From 1 April 2015, a new band for properties valued
between £1m and £2m will be introduced with an annual charge of
£7,000. A further ATED band for properties between £500,000 and
£1m will come into effect from 1 April 2016, with an annual charge
of £3,500.
The ATED CGT rules will also apply to the new bands. The ATEDrelated CGT charge will take effect from 6 April 2015 for properties
worth between £1m and £2m, and from 6 April 2016 for properties
worth between £500,000 and £1m. The CGT changes will apply
only to gains accruing after the commencement dates.
John Christian is a Partner and Head of our
Corporate Tax Team. He specialises in
corporate and business tax, and advises on the
tax aspects of UK and international mergers
and acquisitions, joint ventures and partnering
arrangements, private equity transactions,
treasury and funding issues, property taxation,
transactions under the Private Finance
Initiative and VAT.
These changes mean that the focus of the ATED regime has switched
from “high value” residential to enveloped residential generally.
The consultation announced in Autumn Statement 2013 on
introducing CGT on non-residents holding residential property
was expected earlier in the year, and will now be released shortly
after the Budget. The delay in consultation suggests there have
been difficulties in developing the proposed regime. It will be
interesting to see whether the new low ATED thresholds will apply
to the CGT regime.
E: john.christian@pinsentmasons.com
T: +44 (0)113 368 7924
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PM-Tax | Our Comment
High net worth individuals
by Ray McCann
The Budget has brought little to generate excitement among
high net worth individuals, and some of the changes affecting
resident non-domiciled individuals smack of tinkering around
the edges of non-dom status. Many will however be concerned
by the new rules allowing HMRC to enforce payment of tax for
DOTAS schemes (see Jason Collins’s article on page 3). There are
also proposals to allow HMRC to take funds directly from the
bank account of a taxpayer who has not paid tax actually due to
HMRC, which could include tax in respect of a DOTAS scheme.
Changes are being made to tighten up the expenditure allowed
under the BPRA (Business Property Renovation Allowances)
rules that will reduce the amount that previously could be
claimed. On the brighter side, those looking to invest in start
ups will welcome the fact that SEIS (Seed Enterprise Investment
Scheme) and its associated capital gains tax reliefs have been
made permanent. SEIS gives relief up to £100,000 invested
in qualifying companies, although there is a clear case for the
relief to be expanded.
The changes to dual contracts were announced in advance
and have been softened, meaning that contrary to what was
expected, dual contacts arrangements are not completely
“banned”. This may explain the odd yield estimates that suggest
the changes will have little or no impact.
Ray McCann is a Partner (non-lawyer) leading
our private wealth tax practice and also advises
corporate clients on a range of advisory and
HMRC related issues, especially in relation to tax
planning disputes. Until 2006, Ray was a
senior HMRC Inspector where he held a number
of high profile investigation and policy roles
including, work on cross border tax avoidance
issues with tax authorities in the US, Australia
and Canada. In 2004, Ray was responsible for
the introduction of the ‘DOTAS’ rules.
The announcement of the extension to the 2013 ATED (Annual
Tax on Enveloped Dwellings) was something of a surprise.
Whilst this may seem an obvious extension, it does seem odd
to increase the properties that are within its scope. Given the
criticism levelled at the Government that ATED was a tax on the
South East, perhaps the Chancellor wanted to spread the pain!
That said, since a higher proportion of buy-to-let and property
development projects will come within that price band, it is
probable that this change is more cosmetic than a genuine
revenue raiser. However, residential properties acquired by
companies that are not excluded from the rules will suffer an
SDLT rate of 15% as well as an annual tax charge now ranging
from £3,500 to £140,000 and a CGT charge on sale.
E: ray.mccann@pinsentmasons.com
T: +44 (0)20 7054 2715
The Government is also correcting a technical flaw in the IHT
rules as they apply to “non-doms”. These follow on from the
changes it made in 2013 to what liabilities could be allowed
in computing the estate on death for IHT purposes. In future,
borrowed funds that are simply deposited in a UK bank account
will be treated as not deductible for IHT purposes.
Previously, where a “non-dom” had used borrowings to
acquire assets and those assets were “excluded property” for
IHT purposes, the outstanding liability was not allowed as a
deduction from the chargeable estate. When a non-resident and
non-domiciled individual held funds in a UK bank account in a
currency other than sterling, these were not excluded property
but were nevertheless not charged to IHT. This meant that where
the deposited funds were originally borrowed, the restriction on
liabilities did not apply!
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PM-Tax | Our Comment
Indirect taxes
by Darren Mellor-Clark
With regard to indirect taxes, the Chancellor appeared to deliver
little of earth shattering significance while on his hind legs.
However upon his return to the green leather, HMRC and HMT
put out the associated Overview of Tax Legislation and Rates,
indicating that those taxes existing outside the headlines continue
to play a key part in the Government’s tax strategy.
market destinations such as China, India and Brazil. However, those
fortunate to travel by private jet will be looking at a considerable
increase in APD cost, courtesy of Mr Osborne. The higher rate,
applicable to aircraft of at least 20 tonnes and with fewer than 19
seats, will be increased to six times the reduced rate applicable to
economy class travellers. (Previously it was set at twice that rate.)
Current UK VAT legislation allows suppliers to account for VAT
on the discounted price when customers are offered a prompt
payment discount. This is irrespective of whether the terms of
the discount are actually taken up. Historically most of these
situations have arisen in the business-to-business sector where
consumers are entitled to input tax credit, thus little tax has
actually been lost.
The so called “vice taxes” had a mixed day, with confirmation
that tobacco duty will continue to rise by 2% above RPI inflation
each year until the end of the next Parliament. Beer duty will fall
by a penny a pint, rates of duties on spirits will be frozen and the
duty escalator for wine and high end cider will end. Non-UK based
gambling operators face changes to make all UK facing remote
gambling subject to gambling taxes on the associated profits.
HMRC has identified increasing use of these arrangements in the
business-to-consumer space, where consumers are not entitled
to input tax credit and so this measure is leading to significant tax
loss. This risk has been particularly identified in the telecoms and
broadcasting sectors.
And, finally, across the bingo halls of Britain the arrival of ball
number 10 may no longer be accompanied by the cry of “Maggie’s
den.” The rate of bingo duty will be reduced from 20% to 10% for
accounting periods beginning on or after 30 June 2014.
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
financial services sector.
Changes will be made to UK VAT legislation to ensure that VAT is
accounted for on the full, undiscounted, value of the supply. The
timing is important here. For telecoms and broadcasting services
where there is no obligation to issue a tax invoice, the change will take
effect from 1 May 2014. For all other services, the date will be 2015.
VAT fraud has heavily affected markets such as precious metals,
carbon emissions trading and electronic items. Amid increasing
concern about fraudsters targeting the power and gas markets,
HMRC is acting to reduce the opportunity to undertake fraud.
E: darren.mellor-clark@pinsentmasons.com
T: +44 (0)20 7054 2743
Changes will be made to UK law with regard to supplies of power
and gas in a business-to-business context. In such circumstances
the supplies will be brought within the reverse charge regime,
meaning that it is the consumer who will both account for any
output tax due and also claim the input tax credit. By putting
both VAT liability and credit in the same hands, the opportunity
for fraudsters to abscond with VAT paid to them is, effectively,
removed. The reverse charge regime will not apply to business-toconsumer supplies.
There was mixed news for air travellers with regard to Air Passenger
Duty (APD). The majority of passengers will be pleased with
the news that the destination bands structure will be simplified
to just two, being destinations within a distance of 2,000 miles
from London and those exceeding this distance. The aim of the
measure is to reduce the cost of travelling to many emerging
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PM-Tax | Our Comment
Advanced manufacturing and technology
by Ian Hyde
Chancellor George Osborne made strong signs in February that
the Advanced Manufacturing and Technology (AMT) sector
would get a welcome boost from this year’s Budget. In a speech
at Hong Kong’s Intercontinental Hotel, the Chancellor promised
to “deliver a Budget that supports a Britain that invests and that
exports. A Budget that lays the foundations for our long term
economic security. And a Budget which ensures that around the
world, wherever you are, you can’t help but see ‘Made in Britain’.
That’s the budget I’m going to deliver.”
However, there has been no announcement of any major
structural reform of business rates – something manufacturers
and the British Retail Consortium have been calling for.
Measures, which the Sector may welcome at a policy level, risk
generating unwelcome compliance costs for individual businesses.
For those businesses that have not cleared their historic tax
avoidance schemes, HMRC’s measures to require accelerated
payment of disputed tax will be of real concern. Further the G20/
OECD initiative on international tax – the BEPS (Base Erosion
and Profit Shifting) project – on which a discussion paper has
been published – is a clear indication that for large international
corporates, new rules, compliance costs and uncertainty are on
their way.
The CBI has also been looking for fiscal measures to support
business growth.
After such strong rhetoric from the Chancellor, the question
must be asked whether or not he has succeeded in his bold
claims for the AMT sector. The answer is that there has been
some tinkering but other measures risk more uncertainty and tax
red tape, particularly for large businesses.
Ian Hyde is a Partner who acts for a wide range
of clients and on a range of direct and indirect
taxes including tax avoidance structures, VAT,
customs duties, aggregates levy and pensions
tax issues. He specialises in tax litigation,
representing clients in all aspects of tax risk
and tax disputes, including alternative dispute
resolution, appealing to the Tax Tribunal and
the higher courts, tax investigations and in
tax related commercial disputes including tax
related professional indemnity matters.
The Chancellor listened on measures for SMEs. In particular,
the Annual Investment Allowance (AIA) providing 100% relief
on up to £250,000 of expenditure on plant and machinery
will now be extended until 31 December 2015, with the limit
doubling from this April until 31 December 2015 to £500,000.
SMEs’ spending on Research and Development will also
benefit from increased cash repayments, with the credit being
increased from 11% to 14.5%.
Further, the availability of enhanced capital allowances on
expenditure in designated enterprise zones will also be extended
for another three years to March 2020. The Seed Enterprise
Investment Scheme – giving CGT relief for equity investments
in early stage companies – will now be a permanent relief. These
reliefs will be a boost for SMEs in the AMT sector, although time
limited reliefs are not about the long term.
E: ian.hyde@pinsentmasons.com
T: + 44 (0)121 625 3267 The CBI’s request for a freeze on the Carbon Price Floor – which
encouraged investment in low carbon power generation but risked
making high energy using businesses uncompetitive – has been
answered.
Another item on the CBI shopping list was reform of Air
Passenger Duty to cut the cost of travel for long-haul flights.
George Osborne presented the measure in his speech as a
means of helping British businesses discover emerging markets.
In reality however, the actual significance for the AMT sector
is questionable, and HMRC accept that this measure will have
negligible impact.
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PM-Tax | Our Comment
Energy
by Tom Cartwright
The Chancellor’s announcement of a wholesale review of the
tax regime for the UK Continental Shelf (UKCS) in support of the
recommendations of the Wood Review has the potential to be a
game changer.
with such arrangements, and have instead proposed a cap by
reference to the historic cost of the asset for any deductions for
payments by the UK bareboat charterer under its lease.
One welcome change to these rules is that many vessels will now
be excluded, including FPSOs, heavy-lifting and seismic vessels.
Further, the cap on the deduction allowable has been raised from
6.5% to 7.5% of historic cost. However, the continued application
of the rules to drilling rigs could affect their availability in the
North Sea, where there is already a shortage.
Government policy has to date been inconsistent for the North Sea
and it has to be hoped that this will provide the basis to encourage
investment. More detailed proposals are expected in the Autumn
Statement 2014 following a full industry consultation.
The Wood Review particularly highlighted the low levels of
exploration activity on the UKCS and the inevitably ominous
impact this could have on future production levels.
A further change, of particular interest to shale gas operators,
is the announcement that expenditure on seeking planning
permission and permits, where these are granted, will now qualify
for 100% first year mineral extraction allowances, as opposed to
relief at 10% as is currently the case. It is welcome therefore that the Budget has introduced new
measures which will be of particular interest to smaller enterprises,
who often undertake exploration activity. The Finance Act 2013
introduced an anti-avoidance rule on the transfer of profits, which
would have prevented a buyer of a small exploration company from
giving value to that company’s shareholders for the tax value of
their capital expenditure. It is welcome that a carve-out is now to be
introduced to this rule, which will make these companies easier to
sell and should in turn encourage more investment in exploration.
The measure will take effect from 1 April 2014.
Away from exploration and production, the introduction of a VAT
reverse charge for wholesale gas and electricity will combat the
risk of fraudsters targeting energy companies as part of a Missing
Trader Intra-Community (MTIC) VAT fraud. Such a measure has
long been sought by industry, and it is welcome that HMRC has
finally listened.
The other measures targeted at exploration companies confirm
proposals set out in the Autumn Statement. These will make
it easier for such companies to package pre-trading assets
into a new company for sale and qualify for the substantial
shareholdings exemption. Further, reinvestment relief is to be
extended to allow such pre-trading companies to reinvest their
profits in assets for use in their exploration and appraisal activities.
Tom Cartwright is a Partner and his practice
focuses on all areas of corporate tax, including
the tax aspects of corporate acquisitions and
reconstructions, involving the financing and
structuring of UK and cross-border buy-outs,
mergers and acquisitions. He has considerable
expertise in tax structuring for debt
restructuring and corporate recovery for
distressed businesses. Tom has advised
extensively in the energy sector for oil and gas
companies. He is a member of the UK Oil
Industry Tax Committee.
The announcement of a new ultra-high pressure, high temperature
allowance continues government policy to encourage
development of more difficult fields, to ensure reserves are not
left untapped. Consultation on the details of this allowance will
take place over the summer.
E: tom.cartwright@pinsentmasons.com
T: +44 (0)20 7054 2630
However, the announcement about the controversial tax changes
to Bareboat Chartering arrangements which were proposed in
Autumn Statement 2013 will dismay many in the industry. There
has been some amelioration of the proposed rules, which are
designed to combat perceived tax avoidance in the way assets
used on the UKCS are leased. These are often owned by non-UK
companies and leased under Bareboat Charter arrangements
to UK subsidiaries who then on-lease to operators. HMRC have
decided that existing transfer pricing rules do not deal effectively
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PM-Tax | Recent Articles
VAT, public bodies and outsourcing
by Martin Salisbury of Mitie Group PLC and Ian Hyde of Pinsent Masons
This article was published in Tax Journal on 14 March 2014
The VAT treatment of public bodies is complicated, inconsistent and out dated. When dealing with
public bodies there is often contractual uncertainty over the burden of VAT. The UK leads the way in
outsourced services but VAT should not be a block to this means of service provision. The European
Commission has accepted that current rules act as a disincentive to outsourcing and inhibit
commercial operators from offering competing services. It wants to do something about it but what
will the resulting regime look like and will it help or hinder the provision of public services?
The application of VAT rules to public bodies is by no means
straightforward. Difficult issues arise in identifying what is a public
body and special rules apply to the VAT treatment of outputs and
the recoverability of input tax in the supply of public services. More
topically there has been recognition, by the European Commission
no less, that in a world of increasing private sector involvement
in public services, the current rules are out dated and may be
counter-productive to the efficient provision of public services. The
Commission has suggested in a consultation paper how the VAT
treatment of public bodies might be reformed. For those interested
in outsourcing, partnering or competing with the public sector, the
outcome of this debate will have significant consequences.
Readers of Tax Journal may also be familiar with the problems
of definitions in these areas – what is a public body (University
of Cambridge v HMRC [2009] EWHC 434), what is meant by
“significant distortions of competition” (HMRC v Isle of Wight
Council and others (Case C‑288/07)) and the scope of the
exemptions in Article 132 (R (on the application of TNT Post UK
Ltd) v R&C Comrs [2009] STC 1438, Open University v HMRC [2013]
UKFTT 326) and so on. In particular, the narrowing in scope of
public bodies implemented in HMRC Brief 96/2009 has put quasipublic bodies such as higher education and social housing providers
outside of the Article 13 special rules and decisions such as Rapid
Sequence v HMRC [2013] UKFTT 432(TC) do not help.
Where we are now?
Public sector bodies tend to live on the edge of the VAT system
as delivery of public services may not satisfy the basic tests of
economic activity in Article 9 of the Principal VAT Directive.
However Article 13 provides a general non-taxable supply override
for “states, regional and local government authorities and other
bodies governed by public law” in respect of “the activities or
transactions in which they engage as public authorities”. Such
supplies even if performed for consideration are outside the scope
of VAT, subject to two qualifications – where such treatment
“would lead to significant distortions of competition” or the
activities are specifically listed in Annex 1 to the Directive such as
energy, transport and telecoms supplies.
For supplies by public bodies the out of scope or exempt treatment
may be socially desirable but in the absence of special provision
input tax incurred by providers is an irrecoverable cost. Accordingly,
various member states have introduced ad-hoc input tax refund
mechanisms for certain activities and bodies. The UK has special
input tax recovery rules for two categories of public bodies:
• “ section 33 bodies”, which covers local authorities and certain
other public authorities, have a comprehensive and generous
input VAT refund system for both out of scope and, subject to a
limit, VAT-exempt activities; and
• “ section 41 bodies”, being government departments and other
Crown bodies including certain health service (NHS) bodies, have
a more limited right to input VAT refund on certain goods and
services as directed by the Treasury. Practitioners in this area will
know that details of items qualifying for refund are published in
the London Gazette, although these can be arbitrary and the list
is difficult to find. Furthermore the list is in effect a list of past
outstanding trends and does not encourage innovation.
The position is complicated further by Article 132 that requires
member states to exempt certain activities in the public interest.
These exemptions can apply to both public and private bodies, but
Article 13 has priority over Article 132 so supplies by qualifying
public bodies remain outside the scope of VAT. Readers will be
familiar with the public interest VAT exemptions that include
postal services, medical care, welfare and education.
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PM-Tax | Recent Articles
VAT, public bodies and outsourcing (continued)
Other bodies that are broadly in the public sector have to work
within general VAT rules and so universities and social housing
providers have minimal VAT recovery.
Unfortunately, although many acknowledge the difficulties, , to
date there is no consensus on how the system can be reformed
to eliminate both output and input distortions. The Commission
considers five different options for reform:
•O
ption 1 – full taxation of public bodies and activities in the
public interest;
•O
ption 2 – full refund of input VAT for supplies used in nontaxable activities or public interest exempt activities;
•O
ption 3 – delete the Article 13 special rules relating to public
bodies but keep the exemptions in the public interest;
•O
ption 4 – specific sectorial reform; and
•O
ption 5 – selective amendment of the current rules.
Criticisms of the current regime
The current regime suffers from complexity and inconsistency
both in the UK and between member states which cannot be good
for an efficient tax system.
On the output side the current regime may distort competition
or act as a barrier to private sector provision, as a public body can
provide services VAT free but a commercial operator charges VAT.
Although Article 13 is qualified by the distortion of competition
safeguard and the Annex 1 list, in practice this is difficult to
interpret and enforce. Those interested in predicting how such
safeguards can be applied will not be enthused by the prospect of
another Isle of Wight parking saga. Essentially this protection is
too vague to be effective.
Option 1: Full taxation
Under this option all activities carried out by a public or private
body for a consideration, closely linked to the supply, would be
taxable. An even more radical proposal, as exists in New Zealand,
would be to tax all supplies at market value irrespective of whether
there is consideration for the supply.
On the input side the piecemeal approach to VAT refunds makes
VAT recovery a lottery depending on the type of body providing
the service (section 33 and 41 body special treatments) and the
type of costs incurred (for section 41 bodies if items can be found
in the London Gazette list). For others the lack of VAT recovery is
a disincentive to outsourcing of services, particularly if they are
labour intensive, and so encourages self-supply. This is a particular
issue for registered social landlords, universities, further education
colleges and for some health service projects. It makes outsourced
service providers 20% more expensive, blocking the use of cost
efficient outsourced strategies in public service provision.
The Commission believes full taxation is a preferable solution
as it would increase VAT revenues which could be used to fund
a reduction in the standard VAT rate or provide reduced rates
for socially desirable services. Treating public and private bodies
equally would avoid an output side distortion of competition
and full taxation would enable input VAT recovery resolving
the outsourcing disincentive and self-supply bias. However the
Commission accepts that this option would increase the cost of
public services, lead to public sector job losses and increase social
security costs and concludes it would be difficult to implement.
The input side problem is not new and initiatives such as the
concessionary treatment of catering staff supplies secured by the
British Hospitality Association upon the introduction of VAT and
the recent European Commission enforcement of Cost Sharing
Group arrangements are examples of steps forward, but the
position is still piecemeal and incoherent.
Option 2: Refund system
This option provides input VAT recovery for all Article 13 nontaxable activities and some or all Article 132 exempt public
interest supplies. Eight member states already have some form
of refund mechanism but the proposal would create a uniform
system within the EU.
The Commission’s consultation
The European Commission is consulting on how the VAT treatment
of public bodies can be reformed to deal with these problems. The
consultation period was originally due to end on 14 February 2014
but has been extended to 25 April 2014.
Clearly whilst this would address input side distortions, it would
not address the different output tax treatments of public and
private operators.
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PM-Tax | Recent Articles
VAT, public bodies and outsourcing (continued)
Option 3: Deletion of Article 13 but keeping public interest
exemptions
Public and private bodies would be treated equally as the Article 13
special treatment of public bodies would be removed with socially
desirable services remaining VAT exempt for all suppliers under
a reformed Article 132. This would produce a level playing field
on the output side but the continued exempt treatment would
do nothing to resolve the input side outsourcing disincentive and
would potentially make matters worse if the current limited VAT
refund rights were withdrawn.
Martin Salisbury is Head of Tax at Mitie
Group PLC, a leading provider of outsourced
services to the public and private sectors. He is
member of the CIOT and an active member of
The Business Services Association on tax issues
affecting the service sector.
Ian Hyde is a tax Partner at Pinsent Masons
and member of The Business Services
Association Finance and Taxation Committee.
He acts for a wide range of clients and on a
range of direct and indirect taxes including tax
avoidance structures, VAT, customs duties,
aggregates levy and pensions tax issues.
Option 4: Sectorial reform
Reforms could be limited to specific sectors where distortion
of competition between public and private bodies is proven or
where input VAT recovery blocks investment in service provision.
This is similar to the current Article 13 distortion of competition
safeguard that is considered ineffective not least as changes in
what is technically and commercially possible cannot be predicted
with sufficient certainty to include on a list and the very existence
of a special list is a potential barrier to entry.
E: ian.hyde@pinsentmasons.com
T: +44 (0)121 625 3267
Option 5: Selective reform
Other selective reforms to Article 13 and Articles 132-134 could
be made including making VAT treatment dependent only on
the nature of the supply or offering an option to tax for certain
supplies.
A level playing field?
Reform of public sector VAT rules is not easy and will inevitably
involve public funding and political factors. From the perspective
of a commercial outsourcing business the priority is to remove the
current complexity and bias towards self-supply. In this respect
we support an extension of the VAT refund system in option 2
although this will not resolve output side competition issues.
Options 3, 4 and 5 look to be piecemeal and risk perpetuating
complexity and distortions in the market.
A simpler reform might be to adopt the more limited model under
Option 1, making every activity done for a consideration by the
public or private sector subject to VAT, with reduced VAT rates for
socially desirable services. This would create a level playing field
on the output side and enable input VAT recovery, so resolving
the outsourcing disincentive. For services not performed for
consideration (funded by general taxation or charitable activity)
where competition in supply is not an issue a comprehensive
refund mechanism – option 2 – for public, quasi-public and
charitable bodies may be attractive and end the current input side
distortion in favour of self-supply.
For EC consultation paper see
http://ec.europa.eu/taxation_customs/resources/documents/
common/consultations/tax/public_bodies/consultation_
document_en.pdf
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PM-Tax | Recent Articles
The Secret Hotels2 case
by Stuart Walsh and Piermario Porcheddu
Stuart Walsh and Piermario Porcheddu acted for Secret Hotels2 in its recent win in the Supreme
Court in a case concerning the VAT treatment of online tour operators. Piermario outlines the case
and then Stuart gives us some thoughts on the implications.
Outline of the case by Piermario Porcheddu
The Supreme Court held that all of the relevant contracts made it
clear that Med Hotels was acting as agent for the hoteliers. Lord
Neuberger restated with approval the English law principle that it
is not permissible to take into account the subsequent behaviour
of the parties in interpreting their written agreement. However,
his Lordship noted that subsequent behaviour may be relevant in
determining whether the written agreement was: (i) a sham, (ii)
subsequently varied or rescinded, (iii) incomplete, or (iv) rectified.
On 5 March 2014, the Supreme Court handed down its judgment
in the case of Secret Hotels2 Limited (formerly Med Hotels Limited)
(“Med Hotels”) v HMRC [2014] UKSC 16. Pinsent Masons LLP
represented Med Hotels throughout the litigation process which
resulted in a unanimous decision in favour of the taxpayer.
The case concerned the question of who was supplying EU hotel
accommodation to UK holidaymakers advertised on the Med
Hotels website. In the event that it was Med Hotels supplying the
accommodation as principal (as HMRC contended) it would have
been required to account for UK VAT on its sales margin i.e. the
difference between the purchase price from the hotel and the sales
price to the UK holidaymaker, under the Tour Operators Margin
Scheme (“TOMS”). If instead Med Hotels was acting as the hotel’s
agent (as Med Hotels argued) then it did not make a supply subject
to UK VAT (it being accepted by HMRC that the place of supply of
agency services was where the hotel accommodation was located).
The Supreme Court analysed all of the factors relied upon by
HMRC in respect of the contractual documentation to argue
that Med Hotels was acting as principal and concluded that it
was “unimpressed” by the points relied upon because they all
“stem from, and reflect, the fact that Med had a substantial
business based on the website” which meant that it had built
up “substantial goodwill in the holiday-making market which
it wished to protect, and that it was in a much more powerful
negotiating position than the hoteliers with which it was
contracting”.
The Supreme Court, whose unanimous judgment was delivered
by Lord Neuberger, identified two issues in dispute. First, whether
Med Hotels acted as principal or agent in the supply of hotel
accommodation, an issue to be resolved according to English law.
Secondly, whether Med Hotels was a “travel agent acting solely as
an intermediary” for the purposes of Article 306 of the Principal
VAT Directive, being a matter of EU law.
The Supreme Court went on to consider the characteristics of the
way in which Med Hotels conducted its business which persuaded
the First-tier Tribunal and Court of Appeal that Med Hotels in fact
marketed and sold hotel accommodation to travellers as principal.
The Supreme Court dismissed each of the points individually
and also noted that “those factors, even taken together, are not
inconsistent with, and therefore cannot undermine, the existence
and nature of the agency agreement”.
The first issue
In considering the correct legal approach the Supreme Court
rejected the approach of the First-tier Tribunal and Court of Appeal,
which concentrated their analysis mainly on one contractual
document – namely, the agreement between Med Hotels and
the hoteliers – together with the subsequent conduct by Med
Hotels in performing that agreement. Instead, the Supreme Court
agreed with the analysis of Morgan J in the Upper Tribunal, who
started by assessing the effect of the totality of the contractual
documentation, before considering whether that characterisation
can be said to represent the economic relationship in light of the
relevant facts.
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PM-Tax | Recent Articles
The secret Hotels2 case (continued)
The Last Word? by Stuart Walsh
The second issue
After having established that Med Hotels acted as agent in the
supply of hotel accommodation, Lord Neuberger went on to
consider whether the effect under EU law was that Med Hotels fell
within the scope of Art 306.1(b) of the Principal VAT Directive as
a travel agent who acted “solely as intermediar[y]”. If it did, Med
Hotels was under no obligation to account for VAT in the UK on
its commission. Instead, the hoteliers would be liable to account
for VAT on the gross amount (i.e. the price of the room paid by
the traveller inclusive of Med Hotel’s commission) in the country
where the hotels are located.
This article was published on www.travelweekly.co.uk
on 17 March 2014.
So finally the long-running and widely reported Secret Hotels2
Ltd (“SH2”) litigation draws to a close with a win for the taxpayer.
There are many notable things about the Supreme Court’s (“SC”)
judgment, not least the fact that at each stage of proceedings the
relevant appellate court – Upper Tribunal, Court of Appeal and,
finally, the SC – categorically disagreed with the judgment of the
immediate court below (in particular the three Court of Appeal
judges unanimously found for HMRC; whereas the five SC judges
unanimously found in favour of SH2).
His Lordship considered the judgment of the Court of Justice of
the European Union in Belgium v Henfling (Case C-464/10) [2011]
STC 1851 and noted that, whilst an assumption could not be made
in every case, it would generally be correct to say that an agent
under English law would be an intermediary for the purposes of
Art 306.1(b). Therefore, the Court held that Art 306.1(b) applied to
Med Hotels, which was not required to account for VAT in the UK
on its supplies of agency/intermediary services.
Even the Courts that agreed with each other – namely the Firsttier Tribunal (Tax) and Court of Appeal on the one hand; and the
Upper Tribunal and SC on the other – ultimately did so for slightly
different reasons. This case demonstrates the inherent uncertainty
of pursuing any litigation but also shows that – eventually – the
right answer can be achieved.
What does the judgment mean for the travel industry?
The decision of the Supreme Court is important for the British
travel industry, where 60% of bookings are made online.
The judgment provides clarity on the approach to take when
determining whether a taxpayer is acting in the capacity of agent;
it emphasises the importance of having clear and carefully drafted
written agreements to record the intended relationship between
the parties; and reminds taxpayers of the need to ensure that
their behaviour is at all times consistent with the contractual
agreements entered into.
But now that the litigation has concluded are we in a better place
than we were before? Well the answer to that question depends
upon who the “we” is referring to. It goes without saying that it
is a win for SH2 (although only of historic significance given that
the “medhotels” business was sold by the lastminute.com group
to Thomas Cook in 2009). However, there are also obvious losers.
Last week it was widely reported that the On Holiday Group
(“OHG”), a leading “bed bank” which on the face of it had a similar
business model to SH2, had passed into administration. Covering
the administration, The Independent newspaper reported founder
and chief executive of the Group, Steve Endacott, as saying: “The
withholding (by HMRC) of £4.5m has effectively destroyed the
OHG bed bank business”. Sadly the long awaited confirmation
that a bed bank can be an agent came too late in the day to
provide OHG with a much needed shot in the arm. This will be
exceptionally frustrating to those involved and – more critically –
is likely to result in significant job losses.
For those businesses that have managed to navigate their way
through many stormy and uncertain years of trading accounting
for UK VAT on sales of overseas accommodation as principal
(through fear of HMRC imposing financial penalties if they did
otherwise), notwithstanding a firmly held belief that they have
at all times been the agent of the hotel, the SC judgment offers
hope. This is because although the SC had to determine the case
before it on its own facts, it was also charged with the wider
responsibility of giving guidance to an industry left confused by a
Court of Appeal judgment which offered no real prospect of being
consistently and fairly applied in practice.
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PM-Tax | Recent Articles
The secret Hotels2 case (continued)
To my mind, the SC has done an excellent job in resolving the
numerous uncertainties created across the various judgments
and has delivered clear guidance to the travel sector and beyond
on the legal approach that must be followed for the purposes of
determining whether a business is acting as an agent. The SC has
essentially concluded that the starting point is to characterise
the nature of the relationships in light of the contracts before
considering whether that characterisation can be said to represent
the economic relationship in light of the relevant facts.
Stuart Walsh is a Partner and head of our Tax
Disputes and Interventions Team. He advises
individuals and corporates on resolving
disputes with HMRC in all aspects of direct
tax and VAT and has extensive experience of
working with large FTSE 100 clients. Stuart
specialises in managing large scale litigation
before the Tax Tribunal through to the higher
courts, as well as the Administrative Court and
the Court of Justice of the European Union.
He has particular expertise in managing
litigation where tax avoidance is alleged.
By reference to the SC judgment some travel business will be
extremely confident that their purported agency status is now
beyond challenge; others may be less optimistic; more still may
now be prepared to think about restructuring their hitherto
‘principal’ business as an agency to take advantage of the benefits
that such a model may offer. These benefits may include tax
advantages and legally there is nothing wrong with this – it is after
all clearly established law that a business does not have to arrange
its affairs in a way which results in its paying the most amount
of tax possible. What of course should always be defeated are
artificial arrangements that, for tax purposes, purport to be one
thing but are in fact another. The judgment does not in any way
restrict the ability of HMRC to do this.
E: stuart.walsh@pinsentmasons.com
T: +44 (0)20 7054 2797
Piermario Porcheddu is a Tax Consultant in our
Tax Disputes team who is qualified as a lawyer
in Australia. He represents individuals and
corporates in large scale and complex disputes
with HMRC, particularly disputes involving
VAT and EC law issues.
So is the SC judgment the final word? In respect of SH2, the
answer is yes. For other businesses the answer, at least for now,
is no. HMRC are understandably giving careful consideration to
the terms of the judgment before providing a formal response –
either generally through public notices or specifically to individual
taxpayers directly affected by the judgment, many of whom have
appeals before the Tax Tribunal stayed pending the SC judgment.
E: piermario.porcheddu@pinsentmasons.com
T: +44 (0)20 7490 6963
What is now needed is for HMRC to accept and apply the
principles established in the SC judgment to affected businesses in
a manner which is fair, reasonable and consistent. Hopefully free
of distraction affected businesses can concentrate on delivering a
successful 2014 and beyond.
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PM-Tax | Our perspective on recent cases
Procedure
Universal Enterprises (EU) Limited and others v HMRC [2014] UKUT B4 (TCC)
The UT did not consider it had the power to strike out grounds of appeal on MTIC cases arguing
that Mobilx was wrongly decided but refused a reference to the CJEU for clarification in
relation to the decision in Kittel.
Each appellant had unsuccessfully challenged in the FTT HMRC’s
denial of an input tax credit in relation to the acquisition of goods
where there was MTIC fraud in the supply chain. In each case it
was held that the appellant knew, or should have known, that the
transactions were connected with a tax fraud elsewhere.
In relation to the appellants’ suggestion that the UT make a
reference to the CJEU, although Judge Colin Bishopp stated
that it would be within his powers to make such a reference, he
did not consider that a reference was appropriate or necessary
in these circumstances. He said that there were now four UT
decisions which upheld the decision in Mobilx and that if such
a reference were to be made, it should be made by the Court of
Appeal or the Supreme Court. A reference would therefore not
be made by the UT.
Although the appellants were pursuing their appeals separately
and were at different stages in the litigation process, they were
each the subject of an application by HMRC for the UT to strike
out their ground of appeal arguing that the case of Mobilx Ltd (in
administration) v Revenue and Customs [2010] EWCA Civ 517 was
wrongly decided.
Comment
Although the appellants succeeded in preventing HMRC from
striking out their grounds of appeal in relation to Mobilx, they have
still not managed to have the Court of Appeal’s decision in that
case reconsidered or to get a reference to the CJEU regarding the
decision in Kittel.
HMRC said that it should not be forced to litigate the same points
with every new appeal brought by the appellants individually. It
said that Mobilx was an authoritative interpretation of the decision
of the CJEU in Kittel, which had not been undermined by later CJEU
cases and both decisions were binding on the UT and FTT.
Read the decision
The appellants said the UT had no jurisdiction to strike out the
grounds of appeal. They said there were several cases in which the
CJEU took a different view from that in Mobilx. They suggested
that the UT itself should make a reference to the CJEU for the
Kittel decision to be reviewed.
The UT agreed with HMRC that it was undesirable for any party
to have to litigate the same points repeatedly, but decided that
it did not have the power to strike out the common grounds of
appeal. It said that even if it had the necessary power it would
not be able to apply it to some of the appellants who had not yet
secured permission to appeal to the UT or were still awaiting a
determination from the FTT.
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PM-Tax | Our perspective on recent cases
Substance
Esporta Limited v HMRC [2014] EWCA Civ 155
Gym membership fees paid during a time when a member is barred from entering the gym
(because of late payment) were consideration for a supply of services and therefore subject to VAT.
Esporta is a health and fitness operator. Members enter into
membership contracts under which they commit to remain
members for a 12 month “commitment” period and to pay a
monthly fee. A defaulting member is barred from accessing the
club within five days of defaulting. However, membership is not
terminated and Esporta seeks to recover the fees due for the
balance of the commitment period. Esporta argued that any
payment received from after a member is barred from accessing
the club was not consideration for services and was therefore
outside the scope of VAT. HMRC argued that it was consideration
for services. Although access to the club was withheld, the
overdue payments were still properly to be regarded as being
in return for access to the facilities, which members could still
obtain as of right provided they paid up their arrears.
Giving the leading judgment in the Court of Appeal, with
which the other judges agreed, Lord Justice Vos said that the
payments were a consideration for the supply of services. He
said that the default provisions in the contract did not affect
the underlying analysis of the services that were to be provided
in consideration for the fees. He said that the exclusion of
members on non-payment did not mean that they were being
provided with no services at all. They were being provided with
the same services as before, namely the right to access to the
facilities provided they pay the monthly fees. The analysis did
not depend upon whether the overdue payments related to a
part of the commitment period itself or to months after that
period had ended.
Esporta’s appeal was dismissed.
The FTT decided that late paid fees were not consideration for
a supply of services, but the UT decided that they were. Both
tribunals had to consider whether there were any services which
Esporta provided to the defaulting members in return for the
payment of the overdue fees, and if so what precisely were those
services. The FTT’s answer was that there were no such services,
because the overdue fees were paid as compensation, whilst the
UT said that the service was the provision of access to the gym
facilities during the part of the Commitment Period for which
that was in fact permitted (ie the period before the default).
Comment
The Court of Appeal was not swayed by the precise terms of
the late payment provisions in the contract and looked at
the economic substance of the transaction as a whole and
decided that the payments made by members in default
should be treated in the same way for VAT purposes as ordinary
membership payments.
The decision is not yet available online, other than on a paid
for database.
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Substance (continued)
DMWSHNZ Ltd v HMRC [2014] UKUT 0098 (TCC)
The repayment of loan notes is not the disposal of an asset and so section 171A (as it read before
Finance Act 2009) could not be used to relieve a held over gain that arose on the repayment of
QCB loan notes.
Until 2003 DMWSHNZ Limited (D) was part of Bank of Scotland
group and in 1998 it sold its shares in a wholly owned subsidiary
bank in New Zealand (Countrywide). The purchaser was NBNZ
and the consideration was satisfied by the issuing of loan notes in
NBNZ in favour of D. The loan notes were Qualifying Corporate
Bonds (QCBs) and so the capital gain on the disposal of the
Countrywide shares would only be charged to tax on a future
disposal of the loan notes.
express legislative provision stating that the satisfaction of a debt
was covered by section 171A, the UT said that it must be possible
to identify someone to whom the debt was disposed of when
satisfied. This was not the case from a mere satisfaction of debt.
In the alternative D argued that the settlement of the loan notes
involved the transfer of the loan notes from D to NBNZ because
when the debt is satisfied the loan notes are transferred by D to
NBNZ even if only for a moment, before being cancelled by NBNZ.
D said the UT should focus not on the underlying debt, but on the
loan note instruments themselves. In agreeing with D’s submission
that the proper focus should be the loan notes and not the debt,
the UT disagreed with FTT’s finding. The UT found that there was a
distinction to be made between the debt and the loan note.
Bank of Scotland was owed a substantial amount by an investment
trust and was appointed one of the joint administrative receivers,
which resulted in the capital losses in the investment trust being
allowable for CGT purposes. A restructuring took place in an
attempt to get the losses so that they could be offset against the
held over again in respect of the Countrywide shares. This resulted
in a capital loss being realised by a company (GR3) in respect of
the losses in the investment trust. GR3 and D were now within the
same group and NBNZ repaid the loan notes crystallising the gain.
D and GR3 then made an election under section 171A TCGA to
deem the disposal of the loan notes as having been made by GR3
rather than D so that the loss could be set against the gain on the
Countrywide shares.
The UT therefore considered “not whether the debt has been
disposed of ‘to’ NBNZ but whether the Loan Notes were
disposed of ‘to’ them.” However, the outcome was still the same
as before the FTT as the UT decided that the loan notes could
not outlive the existence of the debt which they represented.
The repayment of the debt did not therefore represent the
transfer of the loan notes.
Finally, the UT agreed with the FTT that section 171A TCGA
could not be applied purposively to give as a wide a meaning
as D proposed. Mrs Justice Rose said that it was clear that the
purpose of section 171A was to enable corporate groups to match
chargeable gains and allowable losses between sister companies
without having to transfer asset ownership within the group.
However she said that the materials D relied upon did not show
that Parliament intended to achieve that goal in respect of all
disposals by sister companies.
Before 2009, the notional transfer provisions in section 171A only
applied where a group company disposed of an asset to a nonmember of the group. The UT had to decide whether the repayment
of the loan notes constituted a disposal of an asset by D.
D argued that the satisfaction of a debt is a ‘disposal’ of the debt
to the debtor from the creditor. It said that the fact that section
171A did not have a carve out provision, as under section 171,
preventing section 171 relief applying to the satisfaction of a
debt, meant that it was Parliament’s intention for the satisfaction
of a debt to be a relevant disposal within section 171A. The UT
disagreed and agreed with the FTT’s decision that the carve
out under section 171 could equally have been there for the
avoidance of doubt. The UT even went further and said that for
the satisfaction of a debt to be covered, it would have expected
it to have been expressly legislated for. In the absence of any
The appeal was dismissed.
Comment
Section 171A was amended by Finance Act 2009, so this is only an
issue for disposals before this date.
Read the decision
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Substance (continued)
Andrew Perrin v HMRC [2014] UKFTT 223 (TC)
Interest on loans made to an employee from an offshore Employer Funded Retirement Benefit
Scheme (EFRBS) had a UK source and was therefore subject to withholding tax.
Mr Perrin was the managing director of a company which
made contributions to an EFRBS which itself in turn made
contributions to another EFRBS (EFRBS 2). Mr Perrin was the
principal beneficiary of EFRBS 2 and the trustee was an Isle of Man
company. The trustee company made several loans to Mr Perrin
which were paid into his Isle of Man bank account. Mr Perrin
used the loans to purchase shares but did not use all of the loans
for this purpose. As a result, Mr Perrin left the remainder of the
loan in his bank account to pay the interest. This meant that the
interest payments were made in the Isle of Man.
The proper law of the loan agreements, which Judge Hellier
determined to be the Isle of Man, was of very little weight. The fact
that the payments were made in the Isle of Man also carried little
weight. Judge Hellier found that Mr Perrin being resident in the UK
was a factor, as too was the fact that Mr Perrin’s obligations to pay
arose in the UK and would be enforced there.
Judge Hellier said that taking all the factors together, the interest
arose in the UK, and so was not relevant foreign income. In his view
the factors of residence and the source of the funds for payment or
enforcement outweighed those of jurisdiction and actual payment.
He said that the fact that interest was paid from the Isle of Man
account did not have substantial weight. The appeal was dismissed.
Mr Perrin paid interest on the loans and HMRC argued that he
should have deducted tax under section 963 ITA 2007. Mr Perrin
argued that the interest arose from a source outside the UK and
was therefore relevant foreign income, which is excluded from the
withholding obligation by section 874.
Comment
This case contains a useful summary of the case law on whether
interest has a UK source.
Judge Hellier first confirmed the principle that the true situs of a
debt is usually the place of the debtor, and in this case meant that
Mr Perrin’s obligations were situated in England. However, he then
went on to consider the authorities, in particular the Greek Bank
case (1970) and Poldi (UK) Ltd (1985), finding that the place of the
source of interest is not determined by the situs of the debt, but
instead the weighing up of a number of factors.
Read the decision
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Substance (continued)
Shop Direct Group v HMRC [2014] EWCA Civ 255
Corporation tax was payable on large repayments of VAT even though the recipient of the
repayments was not the original trader and interest payments were subject to tax as loan
relationships.
This appeal concerned Shop Direct Group (SDG) (formerly
Littlewoods) being assessed to corporation tax on repayments
of VAT amounting to £125m, together with interest of around
£175m. The repayments and the interest arose from VAT appeals
by SDG and its associated companies. Most of the companies
were no longer trading and SDG was assessed to corporation tax
in relation to the companies on the basis that the repayments
and interest were post-cessation receipts within the meaning of
section 103(1) ICTA. In respect of the interest payment, HMRC
said corporation tax was due on the basis that the interest
payment was a profit arising from a loan relationship within the
meaning of the relevant corporation tax version of Case III under
section 18(3A)(a) due to the wide meaning of ‘loan relationship’
derived from section 100(1) Finance Act 1996.
interest was payable on the money debt and the final step in
the analysis was whether SDG, at the time of the payment of
interest, stood in the shoes of a creditor for the money debt.
Here, the Court agreed with SDG that there must be some
form of entitlement to a money debt for a person to stand in
the position of a creditor. However, the Court found that that
entitlement may be in the form of a contractual right and on
the facts, both HMRC and SDG had signed a written agreement
which contained an undertaking by HMRC to repay VAT if certain
events occurred in consideration for warranties from SDG. This
contractual obligation, in the Court’s view, meant that SDG
stood in the position of a creditor as respects the money debt
and was therefore subject to tax on the interest.
As a result of both these findings SDG’s appeal failed and it was
subject to corporation tax in respect of the repayment and the
interest.
SDG’s main ground of appeal was that section 103(1) only
charges the original trader who actually received the sums after
a permanent discontinuance of trade and there is no other basis
on which to charge the repayments to tax. In relation to the
interest payment, SDG said that the FTT had erred in finding that
SDG was beneficially entitled to any VAT repayment. As a result,
it argued, SDG could not have stood in the position of creditor to
create a loan relationship.
Comment
This has been a long-running saga, but it was always going to
be unlikely that having received such massive repayments of
VAT and interest, SDG would avoid a corporation tax charge in
respect of the sums received.
The Court of Appeal rejected SDG’s arguments in respect of the
VAT repayments, finding that the correct interpretation of section
103(1) is that it imposes a charge to tax upon any recipient of a
post-cessation receipt, regardless of whether that recipient is the
original trader.
Read the decision
The Court then dealt with the interest payment and first dealt
with whether the VAT repayment was a money debt. The Court
found that the interest was a money debt, regardless of the fact
that the payment came about from a long period of dispute
and following judgment, because the obligation arose before
the judgment. It was therefore correctly a money debt and not
damages. This conclusion led to the obvious assumption that
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Substance (continued)
Paul Daniel v HMRC [2014] UKFTT 173
An individual failed to prove that he was non-UK resident by reason of working full time outside the
UK. In completing a tax return claiming to be non-resident the individual’s conduct was negligent
and so HMRC could make a discovery assessment outside the 6-year limit.
Paul Daniel was a senior investment banker at Morgan Stanley who
retired and attempted to take up residency in Belgium during the
tax year 1999/2000.
The FTT had to decide whether Mr Daniel could establish that
he had left the UK and worked full-time abroad for the whole of
the tax year 1999/2000. If Mr Daniel satisfied that test then he
would be non-UK resident for the relevant year, and thus exempt
from UK capital gains tax on a £20m capital gain. HMRC had
failed to make a discovery assessment within the 6-year period,
so the FTT had to decide whether their later assessment could
nevertheless be sustained. This required HMRC to demonstrate
that the claimed under-assessment of tax for the year 1999/2000
was “attributable to negligent conduct” on the part of Mr Daniel
or those acting on his behalf in completing his tax return and in
claiming in that return that he had been non-UK resident.
Mr Daniel had chosen to reside in Belgium on account of its
Double Taxation Treaty (DTT) with the UK. Under the DTT (and
the previous residency rules in force at the time) all that was
required for Mr Daniel to become non-resident was for him to
establish that he was employed in full-time work outside the UK
throughout the tax year.
Mr Daniel claimed that he worked full time hours when in Belgium
(because there was nothing else for him to do there) and in his
holiday home in France, but not in the UK. The FTT found that Mr
Daniel was not a very credible witness and were unimpressed at
the lack of evidence produced to support Mr Daniel’s claims. Very
little documentary evidence and not a single email was produced.
The FTT found that Mr Daniel was not working full time abroad.
When considering the amount of work Mr Daniel did, the FTT
refused to accept Mr Daniel’s proposition that he would work for
nearly 12 hour days in his holiday home or in Belgium but when in
London would not work at all so as to be with his family.
As to whether Mr Daniel’s behaviour amounted to negligent
conduct, the FTT found that whilst it was clear that there was
some confusion between the parties, and that the tax advice given
could have been clearer, a reasonable person could have realised
what the requirements were for non-residence. The FTT held that
when Mr Daniel filed his return claiming to be non-resident, he
must have known that he would not be employed full time in
Belgium. HMRC had overcome the burden of proof in showing
negligence and so the assessment was allowed.
Comment
Although this case relates to the old residence rules, it illustrates
how important it is to keep detailed records when trying to show
that you are not UK resident. The FTT was suspicious of the fact
that emails and faxes were not produced in this case and the
individual’s lack of focus on whether he was really working full
time abroad led to a decision that his conduct was negligent.
Read the decision
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