Issue 34 | Wednesday 20 November 2013

In this Issue

News and Views from the Pinsent Masons Tax teamPM-Tax

Our Comment•Autumn Statement predictions •VAT and property funds by Darren Mellor-Clark

2Recent Articles•Tax Deed or Tax Dud? – Points to watch on M&A tax deeds by Eloise Walker and Natalie Stoter•BEPS an African perspective by Heather Self

5CasesProcedure•Edward Behague v HMRC [2013] UKFTT 596 (TC)

•Ingenious Media and McKenna v HMRC [2013] EWHC 3258

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Substance•The Prudential Assurance Company Ltd and Prudential

Holborn Life Ltd v HMRC [2013] EWHC 3249 (Ch)•Rumbelow and Another v HMRC [2013] UKFTT 637 (TC)

•Armajaro Holdings Limited v HMRC [2013] UKFTT 571 (TC) •Aberdeen Asset Management plc v HMRC [2013] CSIH 84 XA100/12

•Versteegh & Others v HMRC •Peter Vaines v HMRC [2013] UKFTT 576 (TC)

Events 19 People 20

© Pinsent Masons LLP 2013

@PM_Tax

In the next edition of PM-Tax we will be covering the Autumn Statement and so we will delay publication until Friday 6 December.

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Autumn Statement predictions

PM-Tax | Our Comments

The Autumn Statement has been delayed for 24 hours to 5 December – so that the Prime Minister can be back from China in time to be there. In recent years the Autumn Statement has become a more interesting event in terms of new tax announcements than the Budget. But what are we expecting will be announced this year?

Here are some predictions from the Pinsent Masons tax team:

CGT on non-residentsPress reports suggest that the Chancellor is considering introducing a capital gains tax (CGT) charge for non-UK residents owning UK property. At present only UK resident individuals are subject to CGT on gains made on residential properties which are not their only or main residence.

If introduced, the new charge would probably apply to non-resident trusts as well as individuals. The suggested rationale for the charge is to deflate the London property bubble, and so the charge is likely to apply only to residential property. If it follows the charge on residential properties held through companies, which was introduced earlier this year, it may only apply to gains arising after the charge is introduced.

Extending CGT in this way involves many complex issues and the impact on particular individuals will depend upon the terms of any double tax treaty between the UK and the country of residence of the individual. In some cases the tax burden on the non-resident will not be increased – the tax revenue will simply accrue to the UK rather than another jurisdiction. Such a fundamental extension to the UK CGT charge would probably be subject to consultation and it could be several years before the full change had effect.

Consultation on partnerships At Budget 2013 the Chancellor announced that the government would consult on changes to two aspects of the tax rules on partnerships in order to prevent tax loss arising from disguising employment relationships through limited liability partnerships; and certain arrangements involving allocation of profits and losses among partnership members.

Revised proposals are still awaited after the consultation closed on 9 August 2013 so we are likely to hear what is now proposed. We are expecting HMRC to drop the ‘first condition’ that would tax partners as employees on a presumption of employment unless a partnership is proved - this is back to front as compared with the existing general rule of presumed partner unless an employee. We also expect to see the carve out of certain commercial arrangements from the mixed corporate and individual partnership profit and loss allocation proposals.

Loans involving participators in close companiesA consultation on changing the rules relating to loans to participators in close companies closed on 2 October 2013. The rules impose a tax charge of 25% on a close company in respect of any loan to a participator which is still outstanding more than nine months after the end of the company’s accounting period. This charge is repaid if and when the loan is repaid. Various options for reform were suggested, including a permanent annual charge on amounts outstanding at the end of the accounting period, or on the average amount outstanding during the accounting period.

Anti avoidance legislation was introduced in this year’s Finance Act in an attempt to block some schemes. We hope for further clarity on where this is going, as the rules introduced this year are causing undue hardship for groups that happen to be accidentally close but are unable by these rules to restructure their debt.

Interest deductibility and loan relationshipsInterest deductions, particularly for private equity companies, have been attracting a significant amount of media attention recently. The UK system gives, as a matter of government policy, relatively generous deductions for interest – albeit subject to anti avoidance provisions. The government may want to wait for the outcome of

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the OECD’s base erosion and profit shifting (BEPS) project before changing the regime. Alternatively, there is a chance that the media coverage may result in some sort of announcement on this topic. There could be a tightening of the debt cap or we may see a revival of the proposals to restrict the benefits of eurobonds issued intra group.

The consultation on modernising corporate debt closed in August so we are likely to get an update on what is proposed and which parts of the reform may make it into Finance Bill 2014 and which may slip.

Controlled foreign companies (CFCs)Following the recent major changes to the tax regime for CFCs we are unlikely to see any substantial change here. However, there could be some changes to the finance company partial exemption (FCPE). It is, however, more likely that HMRC will just provide more guidance on this exemption.

Patent box This has only just been introduced so is unlikely to change. However there may be some sort of announcement regarding the European challenge to the regime. In our view the challenge is unlikely to go anywhere unless the European Council asks for a wider review of such incentives, as several other countries have similar systems so the UK is not out of line.

Self-certification of HMRC approved employee share plansDetails are expected of the proposed new ‘self-certification’ regime for HMRC approved employee share plans. Under the new regime, companies will ‘self-certify’ the compliance of their plan with the governing legislation rather than seek prior approval for the plan from HMRC. Guidance is expected as to the mechanics of the new regime and, crucially, how HMRC expects companies to manage points of difficulty or uncertainty in relation to the application of the legislation, which to date have been resolved either through discussion with HMRC or where market practice has developed. It is the latter category that has the potential to cause companies significant operational difficulty - in particular in cases where practice has evolved such that HMRC’s view on certain points may not be wholly reflected in published guidance. The new regime will need to provide companies with sufficient certainty in order for it to be workable.

Taxation of equity awards held by internationally mobile employeesIt is hoped that HMRC will take the opportunity to provide greater certainty in relation to the tax treatment of equity awards held by internationally mobile employees (IMEs), following a consultation earlier this year on potential changes, and to reflect an apparent change in approach by HMRC indicated by amendments to published guidance. It is a notoriously complex area in which companies have to invest disproportionate time. It is hoped that HMRC follows the recommendations made by the Office of Tax Simplification by bringing in measures which alleviate this burden by making the tax treatment of equity awards held by IMEs consistent with the tax treatment of other earnings.

Tax avoidance schemesA consultation in relation to a new set of obligations for high-risk promoters, their intermediaries and users and penalties to encourage users of avoidance schemes to settle their tax affairs after similar cases have lost in court or tribunal closed in October. We are likely to hear what form the final rules will take.

Code of practice on taxation of banks A response has already been published to the consultation on enshrining in legislation the code of practice for the taxation of banks. However, HMRC is due to publish a list at the Autumn Statement of those banks which have unconditionally adopted or readopted the Code.

Energy Companies Obligation (ECO)Press reports suggest that, in an attempt to reduce household energy bills, the Chancellor is looking at replacing the ECO levy on gas and electricity bills with other taxes to pay for the schemes. ECO obliges energy companies to offer free or heavily subsidised energy efficiency measures such as loft insulation, particularly for low-income households.

Join us at our Autumn Statement Breakfast Event on 6 December to hear what is actually announced and to discuss what the Autumn Statement means for business and the wider economy.

Autumn Statement predictions (continued)

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by Darren Mellor-Clark

PM-Tax | Our Comments

We understand from various sources that the Dutch Supreme Court has made a reference to the Court of Justice of the European Union (CJEU) for guidance on two key issues with regard to the exemption from VAT for the management of special investment funds provided for at EC 2006/112, article 135(1)(g).

Facts are scarce at present, but essentially the background is that the taxpayer entered into agreements with a number of companies investing in real estate. The agreements provided for the taxpayer to:• locate and bring in investors (predominantly institutional investors)•purchase and sell real estate•manage the properties in the real estate portfolio•manage the companies themselves.

For providing the services the taxpayer was paid a fee based upon the annual rent across the portfolio, the value of realised investments and divestments and the value of fund interests acquired by the investors.

The Dutch Supreme Court has asked for clarification of the following points:•Should an entity incorporated by more than one investor for the

sole purpose of investing in immovable property be treated as a ‘special investment fund’ for the purposes of the Directive?

•If so, does ‘management’ as defined in the Directive include the management of the immovable property held by the entity?

The question of what constitutes a special investment fund and what is meant by ‘management’ has been the subject of a number of cases over the last 10 years or so. It is clear from CJEU case law that the definition of which vehicles constitute ‘special investment funds’ is an area of Member State discretion, while the definition of ‘management’ is a matter of Community law.

Member States’ discretion to confer ‘special investment fund’ status is subject to having regard to the aims of the Directive and the requirements of fiscal neutrality. A string of cases, such as JP Morgan Claverhouse; Abbey National; Deutsche Bank; and Wheels has confirmed that the purpose of the exemption is to facilitate investment in securities by the smaller investor. As the companies in question involve investment in immovable property by institutional investors it seems unlikely that the CJEU will rule that definition as a ‘special investment fund’ would fall within the purposes of the Directive. A further point to consider in the UK

would be the increasing use of Real Estate Investment Trust (REIT) vehicles since their introduction in 2007. REITS have become an increasingly popular way to facilitate investment in immovable property, however the management of the vehicles does not, currently, benefit from VAT exemption. Any extension of exemption to non REIT vehicles investing in immovable property could cause significant issues with the requirement for fiscal neutrality. Of course careful consideration would need to be given as to whether the structure of the fund allowed investment in such asset classes.

Of potentially greater interest in the UK is the characterisation of the property management services. Management services relating to the management of the portfolio itself at a macro level have usually been seen as not comprising services relating to land for VAT purposes. Such services have included, for example, asset allocation (as regards types of property to purchase/dispose of etc); securing funding and finance; and selecting properties for investment/divestment. This has had advantages as regards place of supply and offshore fund vehicles in both the pre and post 2010 VAT package environments. However, services such as maintaining individual buildings; dealing with tenant issues; and ensuring the buildings are cleaned etc have normally been seen as relating to the land itself. The effect of this has been to subject such fees to UK VAT, even where the fund vehicle itself is offshore. Any movement in the current, reasonably well understood, status quo is likely to be of profound interest for the property investment sector. Affected businesses should watch this space.

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.

E: darren.mellor-clark@ pinsentmasons.comT: +44 (0)20 7054 2743

VAT and property funds - are we about to see a widening of the exemption for the management of special investment funds?

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Tax deeds. They are the must-have accessory to any UK domestic private M&A deal. Every firm has its own precedent, saying the same things in slightly diferent ways, but the key point of them all is quite simple and can be condensed into two short sentences: ‘Seller, if there’s any unexpected tax in this target that I as buyer don’t find out about until after I’ve bought it, I’m expecting compensation’; and ‘Buyer, you can’t control the compliance process to cause problems that weren’t already there.’

Litigating a tax indemnity seems to be developing into a trend

Simple enough, but as with all things tax related, the devil, sadly, is in the detail. Whilst your average tax deed works very well for your average UK domestic deal, things can start to unravel quickly when the standard form meets the reality of what can be quite messy circumstances, especially in the global context. Hence, litigating a tax indemnity – unheard of a few years ago – seems to be developing into a trend.

The source of dispute varies, but recent examples include whether:

•an unanticipated change in accounting period could affect loss allocation in a notional calculation (RIG Holdings LP v Aeroflex Test Solutions Ltd [2009] STC 2521)

•the seller could use their administrative tax compliance powers to take the benefit of an over-provision indirectly, where the ‘overprovisions’ clause itself does not allow this (Drachs Investments No 3 Ltd v Brightsea UK Ltd [2012] STC 1507)

•handing over a repayment of tax could automatically include the interest on it (Teesside Power Holdings Ltd v Electrabel International Holdings BV and another [2012] STC 774)

•proper notice of a claim is given where there is a conflict between the tax deed and the share purchase agreement (SPA) notice provisions (Kuoni Travel Ltd v Boyle and others [2013] EWHC 877 (QB))

•contingent consideration clause, linked to the utilisation of losses, could be triggered by the use of the losses, or whether that use must also involve an overall commercial net benefit (Ardagh Group SA v Pillar Property Group Ltd [2013] EWCA Civ 900); and

•a disputed Ugandan tax demand could count as a ‘non-transfer tax’ paid by the buyer for the seller’s account and reimbursable under SPA provisions (Tullow Uganda Ltd v Heritage Oil and Gas Ltd & Anor [2013] EWHC 1656 (Comm)).

What all these cases have in common is an (alleged) ambiguity between the parties as to what they agreed and what the tax provision drafting actually means in practice. Taken collectively, they reveal some practical pointers on things one should watch out for:

Check that the provisions in the SPA and tax deed do not conflict: In Kuoni, the SPA provided that a claim under the tax deed must be notified to the seller within 30 days of the purchaser becoming aware of it; notice under the tax deed had to be given on or before the expiry of seven years from the end of the accounting period current at completion. The court surmised that the inconsistency in the drafting resulted from the seller’s solicitors drafting the SPA and the purchaser’s solicitors being responsible for the tax deed – but the tax deed prevailed, because it contained an explicit clause giving it precedence. As this division of labour is common, either avoid putting the ‘same’ provisions in two places or do make sure that the SPA and tax deed say the same thing!

Be clear about the level of knowledge that is required to trigger a notice obligation: The court judged in Kuoni that there was no requirement to give notice of the tax claim to the seller until the purchaser or company had received advice from their principal tax advisers which outlined the exact details of the tax

by Eloise Walker and Natalie Stoter

Tax Deed or Tax dud? – Points to watch on M&A tax deeds

The growth in litigation of M&A deals is starting to show that the tax deed that should be a buyer’s protection, isn’t always working as it should. One factor that many cases have in common is an (alleged) ambiguity between the parties as to what they agreed and what the tax provision drafting actually means in practice. How can these problems be avoided? Use the standard form precedents with caution, remember to take into account the details of the actual deal on the table, and make sure you know what you (or your client) are signing.

This article was published in Tax Journal on 8 November 2013

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liability. This was fact specific and another judge on another day may have taken a different approach. However, the tax deed should be clear about what triggers the obligation to give notice and a two-tier system – where the seller is informed as soon as a potential problem comes to light, but the formal notice of liability under the deed is triggered later, once the exposure is more certain and quantifiable – may be better.

Be aware of the potential tax charges that could arise in overseas tax jurisdictions: The judgment in Tullow emphasises that when buying a target group in another jurisdiction, one must think about the potential tax liabilities that can be imposed and not assume that local tax law will work in the same way as the UK. In Tullow, the Ugandan tax authorities issued a tax assessment on the seller which was disputed. The authorities then demanded that the purchaser pay as the seller’s agent under local tax collection legislation. Its commercial licences to operate in the area were threatened and, after receiving local advice that the demand was valid, the purchaser paid and then sought to recover the amount under the tax indemnity in the SPA which made ‘non-transfer taxes’ for the seller’s account. The case illustrates the difficulties of doing business in regions such as Africa, India and China, which take a different approach to the UK in the capital gains taxation of non-residents. It also highlights several practical issues, of which the two key points are:

•What do the parties mean by ‘tax’? A key point of argument was whether the tax was actually due, and the judge interestingly held that the indemnified party did not have to show a 51% likelihood (i.e. on the balance of probabilities) of a tax demand being valid before the indemnity was triggered.

•How important is notification? It was held that compliance with notice requirements is not a condition precedent to liability unless it is clearly drafted as such (though the covenantor might counter-claim for breach of contract if loss results from non-compliance).

Watch out for the basis upon which the target’s accounts are to be drafted and state assumptions: The RIG Holdings case was based upon a lack of certainty in the drafting as to how the target’s straddle period accounts were to be prepared. The parties considered neither the eventuality that the accounting period could be extended to 18 months, nor how a mechanism to determine whether losses were offset against profits would operate in this situation. Consequently, there was more than one method of affecting the split of profits and losses in the period.

Clarify what payments made under the tax indemnity include: In Teesside Power, the parties negotiated and drafted an unusual refunds clause in the tax deed. The drafing was silent on whether a repayment of tax under this clause would include the interest element of the repaid tax, but in a different clause, interest was

explicitly included. As the judge commented, ‘it was not that the parties consciously excluded the treatment of interest paid [by HMRC] from [cl 6] but that there was no agreement as to its inclusion’. Consequently, the interest element of a refund from HMRC was not payable.

Include clear drafting if you want a calculation to look at net overall commercial benefits: In Ardagh, the payment of additional contingent consideration depended on whether losses had been used by the buyer group. The fact that the losses were usable only pursuant to a package deal with HMRC, in which other losses were given up and the buyer group might have no net commercial benefit, was held to be irrelevant. This case also illustrates the importance of checking the wider picture (especially tax deeds on old deals) before settling disputes with HMRC.

It is difficult to plan for the unscrupulous vendor or purchaser who may try to bend the tax deed to a purpose it was never meant to enable

And, finally, pay special attention to which party should receive any unexpected tax benefits under the tax deed: In Drachs, the seller wanted to direct the purchaser to adjust surrenders of group relief previously made to divert losses from a target company to a retained company, so that it could ultimately gain the benefit of an over-provision. The Court of Appeal decided, in favour of the purchaser, that a contractual limitation prevented compliance powers being used to change the allocation of liabilities between the parties. This emphasises that if the seller wants to take advantage of unexpected tax benefits, then it must seek an express provision for it in the ‘over-provisions’ clause of the tax deed.

Tax Deed or Tax dud? – Points to watch on M&A tax deeds (continued)

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The cases discussed above are only those which ended up in court. You’ll never hear about the cases that settle in mediation, but it’s worth mentioning some other disputed areas to watch out for:

Be clear what you mean by ‘provisions’: The standard exclusion for tax provided for in the accounts is an area ripe for argument. One should bear in mind that using accounting terms like ‘provision’ and ‘reserve’ may not have the general meaning the parties intend. The practicalities of proving whether something has been taken into account in formulating audited accounts can also be harder than the layman might envisage.

Beware of the vague tax compliance clause: In the group payment arrangements clause, for example, it can be difficult to prove what has or has not already been paid to a fellow group company or discharged on their behalf (especially if the group members do not have separate bank accounts). This can cause serious problems if it is not clearly set out which company still owes what to whom at completion.

Of course, the best tax deed in the world will not cater for absolutely every eventuality, and it is difficult to plan for the unscrupulous vendor or purchaser who may try to bend the tax deed to a purpose it was never meant to enable. Yet clear drafting, focused on the tax characteristics of the target group being bought, which the parties have discussed and understand (and have that all important email trail reflecting intention), can only help the situation if you end up with a disagreement. Otherwise, let the parties beware!

Eloise Walker is a partner specialising in corporate tax, finance and investment funds. She advises corporate and financial institutions on UK and cross-border acquisitions and mergers, reconstructions, corporate finance, joint ventures and onshore/offshore establishments.

E: eloise.walker@pinsentmasons.comT: +44 (0)20 7490 6169

Natalie Stoter is a solicitor in the tax team undertaking a variety of tax advisory work, with a particular focus on corporate tax and mergers and acquisitions. She also has experience in advising high net worth individuals on various tax issues.

E: natalie.stoter@pinsentmasons.comT: +44 (0)20 7490 6426.

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Tax Deed or Tax dud? – Points to watch on M&A tax deeds (continued)

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by Heather Self

BEPS – an African perspective

PM-Tax | Recent Articles

The Organisation for Economic Cooperation and Development (OECD) was asked by the G20 to look into ways to prevent base erosion and profit shifting (BEPS) – the avoidance of tax by pushing activities abroad to low or no tax jurisdictions. In July 2013 the OECD launched an Action Plan on BEPS which it aims to deliver over 18 to 24 months. How will this impact on Africa?

Most of the debate surrounding tax avoidance by multinationals has been focused around the avoidance of US and European tax. This article contains some personal reflections on how the BEPS project is likely to impact on African countries. It is based on a talk I gave at the 4th London Alumni International and EU Tax Conference organised by the Centre for Commercial Law Studies at Queen Mary University of London on 25 October 2013. I am using ‘Africa’ as shorthand for ‘less-developed resource-rich countries, for example in sub-Saharan Africa’. I am not a development specialist so am commenting from the perspective of a UK, European or US practitioner, with my views on some of the points which have been put forward by Non-Governmental Organisations (NGOs).

How relevant is the BEPS project to Africa?The current BEPS project is an OECD project, and is looked at primarily from the perspective of the sophisticated regimes which exist in the vast majority of OECD member countries. In my view, it needs also to consider the needs of Africa, and to ensure that the perspective of less developed countries is heard.

Many of the problems highlighted by the BEPS paper can be solved by OECD members if they put their minds to it. For example, dealing with the accumulation of profits in tax havens can be dealt with by effective controlled foreign company (CFC) rules. The US Senate papers relating to the Apple hearings show clearly that the defects in the US system are well-known and within its power to cure. The Irish introduction of an incorporation test of residence is a first step, but the US also needs to come to the table.

One issue is conduit companies - the so-called ‘sandwich’ structures whereby investments in Africa are funnelled through a low tax jurisdiction like Mauritius which has a favourable double tax treaty with the African country where the overseas company is operating, with the result that little tax is paid in the country where operations are taking place. Conduit companies could be

dealt with by more effective limitation of benefit (LOB) provisions in double tax treaties, although I am not convinced that a universal LOB would be an acceptable burden to place on all multinationals.

Trading blocks such as the EU could persuade their members to impose domestic withholding on payments being made to tax havens.

None of this requires action by Africa to solve, but maybe by making the total cake larger perhaps Africa could be left with more than the crumbs. This is often referred to as the ‘spillover’ effect: I am personally unconvinced that using CFC systems as a tool to prevent foreign to foreign avoidance is an efficient mechanism, but the general principle of making it harder to accumulate profits in a tax haven means there is less incentive to shift profits out of a developing country.

Similar comments could be made in relation to hybrids: the UK, for example, has a range of rules to deal with arbitrage, including the group mismatch rules from 2009. Again, the US is odd in following its ‘check-the-box’ logic through to local countries, rather than respecting the local treatment of an entity.

So that leaves us with transfer pricing issues, including in particular the issue of digital products and services – again, more a question for developed countries to divide up their own cake rather than something which directly affects Africa – at least yet.

NGOs point out that total tax receipts in low income countries are significantly below those in the OECD. It is clear that evasion is part of the problem, and the moves to greater transparency will help reduce this. But there is also a tendency to blame multinationals for ‘tax dodging’. I have some scepticism as to whether this is the major part of the problem. Even if it is, I am not convinced that the solution is for more transfer pricing audits.

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However, I do support the conclusion of the Christian Aid policy brief, that the BEPS project must deliver results for poorer countries as well as richer.

What are the key issues? Local corruption and lack of reliable processes are a basic problem in Africa. There is no point imposing more tax on multinationals if it does not reach its target – in the same way that aid is useless if it is misappropriated.

In addition, the tax authorities in many African countries lack the ability to carry out robust audits and frankly to collect the tax that the law already says is due. Much is being done, for example the proposal to have South Africa act as a hub for other countries, or the OECD’s Tax Inspectors without Borders project. However, in my view trying to help local tax authorities carry out sophisticated transfer pricing audits may not be the most practical approach. My impression is that this imposes burdens on multinationals for little real result. Even if transfer pricing is part of the problem, is this the best way to reach a solution?

A more fundamental problem is the underlying structure of the tax systems. Many were imported wholesale from the French, UK or Russian equivalent. Alongside this are treaties which perhaps were not negotiated by equals in terms of negotiating power, so that the cake is not always shared fairly. For example there may be inappropriately low withholding tax rates and tax ‘holidays’ may well have been granted without a clear picture of whether they gave overall economic benefits.

However, solutions need to be built up from a local perspective and not imposed by the OECD. For example, there are some very constructive developments in Burundi – as a recent paper published by the Africa Research Institute shows.

Low priority areasI do not think that country by country reporting (CbC) is a key part of the solution. I am not against greater transparency, but I do not think that CbC passes the value for money test. It will produce reams of raw data, and given the track record of, for example, the Public Accounts Committee in interpreting complex data in UK or US multinationals’ accounts, I am not convinced that it will produce anything that will produce a step change in receipts.

Similarly, having local tax authorities trying to engage in complex transfer pricing disputes is resource-intensive and it is not easy to win the arguments. And it may even be the case that the transfer pricing of multinationals is perfectly reasonable under the existing rules – as Philip Baker QC points out in his paper on the improper use of tax treaties, “to refuse the tax advantage in cases where

there is no improper use of the tax treaty would defeat the objective of the two countries in entering into the treaty.” I am not condoning ‘transfer mis-pricing’, but I do question whether it is as widespread as some would like to think and whether transfer pricing audits are the best route to collect more tax.

For similar reasons, I am not convinced that academic focus on unitary taxation or destination based corporate tax is the best route to go. We need practical answers not esoteric debate.

Where would I start? As economists have often said, taxing items which do not move is often more productive than trying to tax mobile factors…so should we start with a focus on natural resources?

This is a key element of the African Mining Vision paper, and it is also interesting that it is a solution which developed countries have used too – see the UK’s approach to North Sea oil taxation, or the revised approach to mineral resources announced by Australia a couple of years ago. It seems to me that defining the economic rent from the use of resources, and imposing tax on it, could be a good solution to base erosion. It is also much simpler than trying to find complex formulae to restrict deductions.

As a proxy for resource taxation, we should take another look at withholding tax, which may be simpler to impose and collect. Care needs to be taken not to impose gross withholding tax on business income – there needs to be an attempt to use a profit-based rate of withholding tax, such as 20% of a deemed profit percentage, since otherwise investment will be deterred by effective tax rates which are potentially greater than 100% of true profits.

If double tax treaty rates are currently low, perhaps the OECD members could agree to allow certain countries to re-impose higher rates by agreeing multilaterally that current treaty rates will be superseded.

Tax holidays are a problem – particularly if activity turns out to be more profitable than expected. Perhaps we should look at development grants instead.

Any changes to the existing corporate tax system need to pay proper attention to transitional provisions – simply over-riding an existing agreement will make it difficult to persuade future investors to trust that they can rely on any properly-negotiated tax agreement. See, for example, Mongolia’s recent withdrawal from its tax treaties with Luxembourg, the Netherlands, Kuwait and the United Arab Emirates.

BEPS – an African perspective (continued)

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Much of the focus is on corporate tax – should there also be a focus on non-corporate tax measures? For example, imposing taxes on wages, provided they would not simply be borne by poor workers.

Finally, to return to capacity-building – a focus on practical issues is again my key message.

My attention was drawn to a recent paper by Richard Bird, which sums up the position very well – let us look for what will work on the ground, and wherever possible keep it simple and practical.

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.

E: heather.self@pinsentmasons.comT: +44 (0)161 662 8066

BEPS – an African perspective (continued)

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Edward Behague v HMRC [2013] UKFTT 596 (TC)

Procedure

PM-Tax | Cases

A solicitor’s engagement letter attracts legal professional privilege (LPP) to the extent that it sets out what the advice will cover, as LPP extends not only to the content of the legal advice but the fact that a person sought legal advice on a particular matter.

HMRC opened an enquiry into Mr Behague’s self assessment return and issued a notice requiring production of certain documents. Mr Behague appealed against the notice claiming legal professional privilege (LPP) in respect of an engagement letter with a firm of solicitors and a report in relation to trust arrangements produced by the solicitors.

The two documents were, as required by the LPP regulations, delivered to the Tribunal. Unfortunately, in breach of the LPP regulations, the Tribunal then copied the documents to HMRC, although HMRC destroyed the copies it was given. On a prior occasion the Tribunal had dismissed an application by Mr Behague for his appeal to be allowed because of claimed irremediable prejudice caused by the Tribunal’s mistake.

The FTT now had to decide whether LPP applied to the documents on the basis of written submissions. Judge Barbara Mosedale decided that a solicitor’s engagement letter does not attract LPP to the extent that it just sets out the terms on which the solicitor is to advise. However, an engagement letter will qualify for LPP to the extent that it sets out what the advice will cover. She said that LPP must extend not only to the content of the legal advice but the fact

that a person sought legal advice on any particular matter. However, the whole letter would not qualify for LPP, only the relevant bits.

The FTT decided that a report prepared by the solicitors on trust arrangements was subject to privilege. Although some of its schedules contained non-privileged items such as copies of HMRC publications and notes of meetings, the FTT said these should also attract privilege as schedules to a privileged report, as, if disclosed, they would identify the subject matter on which the solicitors gave legal advice to their client.

CommentThe case confirms that LPP attaches to documents merely identifying the fact that advice is sought on particular issues and not themselves giving substantive advice.

The benefit of the LPP Regulations in enabling the FTT as an independent third party to decide whether something attracted LPP was potentially undermined in this case by the Tribunal itself failing to follow the regulations and sending a copy to HMRC of the disputed documents!

Read the decision

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Ingenious Media and McKenna v HMRC [2013] EWHC 3258

HMRC was not acting unlawfully when it discussed with reporters the involvement of a company and an individual in tax avoidance schemes as this was a legitimate means of promoting public awareness.

Two reporters from The Times newspaper (partially on a promise to provide information of interest to HMRC which in any event never materialised) met with Dave Hartnett, then a senior commissioner of HMRC for a meeting regarding a tax avoidance article they were planning to write. The meeting, which HMRC saw as an opportunity to raise public awareness of its work, was agreed as ‘off the record’ and this was acknowledged by both parties. However, the reporters both later ran stories disclosing information and quotes from the meeting, including the fact that Mr Hartnett had described film tax schemes as “scams for scumbags” and labelling Mr McKenna, whose company Ingenious Media was involved in promoting film tax schemes, as a “threat” and a “big risk” for HMRC.

Ingenious Media and Mr McKenna applied for judicial review of Mr Hartnett’s decision to release the information to the journalists, saying that HMRC had acted unlawfully in breach of their obligations under public law.

Ingenious Media and Mr McKenna argued before the High Court that the disclosure of information to the journalists was in breach of their human right to private life and Section 18 of the Commissioners for Revenue and Customs Act 2005 dealing with confidentiality. The claimants also relied on HMRC Manual Guidance arguing that that the manual imposes a restriction on HMRC or creates a legitimate expectation in respect of confidentiality on which they could rely.

The confidentiality section of the Commissioners Act 2005 is subject to an exemption which applies where the disclosure is “made for the purposes of a function” of any power or duty of HMRC and Mr Justice Sales said this exception applied. The judge found for HMRC that “there was a rational connection between the function of HMRC to collect tax in an efficient and cost-effective way and the disclosures made.” In coming to this conclusion, the judgment made clear that the court’s role was “not to ‘second guess’” decisions as “it is not appropriate for the court to approach the matter as if it were the primary decision-maker.” The court should, according to the judgment, only intervene if the HMRC officer’s judgement was “irrational.”

The question then was whether Mr Hartnett could reasonably have taken the view that disclosing the information would assist HMRC in the exercise of its duty of tax collection. With matters of public interest at the fore, the judge decided that it was a reasonable view and that it was a legitimate and appropriate action to disclose the information. The judge was swayed in part by the fact that the media had been critical of HMRC for making ‘sweetheart’ deals and found that the reporters’ promise to supply information which would assist HMRC (even though the information never materialised) was a further legitimate reason for the release of the information. It was immaterial to the decision that no judgment had been actually determined on whether the schemes were definitively abusive as HMRC has a special position to inform the public of its views on tax matters.

The judge also commented that similar decisions would need to be considered on a case by case basis, but on the facts here, the disclosure made by the HMRC Officer was “very limited in nature” and it was apparent on the facts that the reporters already knew of the claimants’ activities in the most part. The fact too that the meeting was ‘off the record’ added further legitimate basis to Mr Hartnett’s decision to disclose the information, even though this was later breached.

Mr Justice Sales said that the HMRC manual only explained the legal position and did not create a restriction. It may in some circumstances amount to a legitimate expectation, but not in this case given that Mr Hartnett was acting in compliance with the policy. On all other matters the claimants’ claims were dismissed as Mr Hartnett’s disclosure “fell well within the wide margin of appreciation to decisions of state authorities in the field of tax policy.”

CommentThis case suggests that HMRC has wide discretion, as part of its functions, to ‘educate’ the public and this includes using the press to get their messages out. However the judge did make it clear that in this case very little was actually disclosed by HMRC and the reporters were well aware of the activities of Ingenious Media and Mr McKenna.

Read the decision

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Procedure (continued)

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This case forms part of a group litigation order relating to the tax treatment of dividends received by UK companies from overseas portfolio shareholdings. The Claimants in this test case are UK insurance companies.

The ECJ and the Supreme Court confirmed in the FII Group Litigation case that foreign portfolio dividends received by UK companies were treated less favourably than domestic dividends (as the former were taxed as Schedule D Case V income whereas the latter were exempt from corporation tax). Although the UK provisions were justified, there was still a breach of EU law as the legislation was disproportionate to achieving the justification.

Instead of exempting foreign dividend income to bring it in line with domestic dividend income, the Court held that in addition to the credit for tax actually paid on the underlying profit, an additional credit should be given at the nominal rate of corporation tax paid by the foreign distributing company (capped at the UK nominal rate applicable to the dividend less withholding tax). Taxpayers who had submitted returns claiming exemption, would have to re-submit these returns, claiming instead a credit at the level required by EU law.

The parties agreed that in relation to the claims where either corporation tax or advanced corporation tax (ACT) was unlawfully levied, such claims were characterised as ‘San Giorgio’ claims under EU law (which requires the reimbursement of unlawfully levied tax).

The only restitutionary defence pleaded by HMRC was ‘change of position’, which is available where a defendant has in good faith changed their position such that it would be inequitable to require the defendant to make restitution of those sums. HMRC argued that the sums in question paid by the Claimants formed part of the UK’s tax revenue for the relevant year in which they were paid and those sums had been irretrievably spent, in some cases many years ago.

Referring to recent case law of the ECJ, the Court held that this defence was not available to HMRC as the only substantive defence which EU law recognises to a San Giorgio claim is that of unjust enrichment of the taxpayer. In any event even if the defence were not precluded by EU law, the Court commented that HMRC had adduced no evidence and given no disclosure in relation to this issue.

On the basis that the Claimants had a valid claim for restitution, the next question was whether compound or simple interest should be payable on the amounts claimed.

HMRC accepted that compound interest was payable in respect of the utilised ACT claims, because that is what the House of Lords decided in the Sempra Metals Ltd case. However, the Court also held that the Claimants were entitled to compound interest on all their claims.

Recognising that this was the first occasion on which an English Court was seeking to apply the guidance given by the ECJ in the Littlewoods case, the Court confirmed that the Littlewoods case did not rule that the right to interest meant to compound interest. It commented that it was for the internal legal order of each member state to lay down these conditions provided that they complied with the principles of equivalence and effectiveness. The Court even suggested that in the absence of any unqualified EU right to compound interest, a payment of simple interest will sometimes be all that EU law requires the national court to provide.

The Court rejected HMRC’s argument that, save in relation to utilised ACT, the position was governed by section 35A of the Senior Courts Act 1981 which provides a discretion for the award of simple interest on recovery of a debt in the High Court. The Court held that compound interest forms part of the principal sum that needs to be awarded in order to achieve a full restitution.

The Prudential Assurance Company Ltd and Prudential Holborn Life Ltd v HMRC [2013] EWHC 3249 (Ch)

The UK’s former rules on the taxation of overseas portfolio dividends were contrary to EU law as they did not grant an additional credit at the nominal rate of corporation tax paid by the distributing company. Compound interest was payable on the sums claimed.

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The Court applied the same reasoning and reached the same conclusion in relation to the Claimants’ claims for the recovery of unlawfully charged corporation tax. In the Court’s mind, no distinction could be sensibly drawn in this context between ACT and corporation tax – in each case HMRC was enriched by the overpaid tax and in each case full restitution required an award of compound interest as part of the principal sum which the Claimant was entitled to recover.

The Court then went on to confirm that if compound interest were to be awarded it should be at conventional rates calculated by reference to the rates of interest and other terms applicable to borrowing by the Government in the market during the relevant period, that being the solution adopted by a majority of the House of Lords in Sempra Metals Ltd.

AHL provided management services to its subsidiaries and associated undertakings. One of these was AAM, a limited liability partnership. In March 2008, AHL, which already held a 44.64% interest (in terms of fixed capital contribution) in AAM, acquired the interests of three other members of AAM for $23,763,000. Following this AHL’s interest in AAM was 59.25% in terms of fixed capital contribution and 100% in terms of capital profits participation and 100% in terms of income profits participation, subject to some small rights belonging to an individual. AHL had full control of the voting and management of AAM.

Before the March 2008 transaction, AHL’s interest in AAM was recognised in AHL’s accounts as an investment. Following the acquisition of a controlling interest in AAM, AHL’s entity accounts to 31 August 2008, in accordance with UK GAAP, showed AAM as a subsidiary undertaking and not as goodwill. The consolidated group accounts for the period showed goodwill relating to the purchase of AAM of US$22,553,000 that was to be amortised over seven years.

AHL’s calculation of profits for corporation tax purposes treated the purchase of a controlling interest in AAM as an acquisition of goodwill by AHL of $23,335,823. The cost of acquisition of the goodwill was to be amortised over seven years and so AHL claimed tax relief under Schedule 29 to the Finance Act 2002 in the sum of $1,666,845 for the relevant part of the accounting period to 31 August 2008.

HMRC denied the deduction and AHL appealed to the FTT.

AHL argued that section 118ZA ICTA meant that it could claim the relief because it treated an LLP as transparent for corporation tax purposes. It argued that this requires that relief under the intangibles regime be available if it would have been available had AAM been a

The Court commented that this result satisfied the requirement of effectiveness under EU law and provided the claimants with an ‘adequate indemnity’ as required by Littlewoods.

CommentThis decision is of importance due to the comments on the ‘change of decision’ defence and the issue of compound interest. The judge in this case (Mr Justice Henderson) will also be giving the decision in Littlewoods and although based on different facts, it has given taxpayers hope that compound interest may also be awarded in that case.

Read the decision

general partnership, not an LLP. HMRC argued that AHL’s accounts did not recognise the goodwill and did not seek to amortise the expense: without this, as Schedule 29 follows the accounts, no relief could be given. HMRC argued that it was irrelevant if relief would have been available had AAM been a general partnership and not an LLP, because it was in fact an LLP.

The FTT dismissed AHL’s appeal. The judges said that section 118ZA does not provide for a general ‘look-through’ and, specifically, it does not apply for accounting purposes. As relief under Schedule 29 is given by reference to expenditure written off or written down for accounting purposes, if accounting rules or practice do not permit the expenditure on acquiring an interest in an LLP to be treated as the acquisition of the LLP’s intangible fixed assets then section 118ZA does not change the accounting rules or practice or deem the accounts to include something that they do not include. Therefore AHL was not entitled to intangibles relief under Schedule 29 in respect of its acquisition of the interests of other members in AAM by reference to AAM’s goodwill. The fact that if AAM were a general partnership, it would have been appropriate for AHL to treat its acquisition of a controlling interest in AAM for accounting purposes as an acquisition of the underlying goodwill which AHL could proportionally consolidate in its accounts did not assist AHL in the actual circumstances of AAM being an LLP.

CommentThis case illustrates that although an LLP is tax transparent for most purposes, this does not necessary mean that it will be taxed in exactly the same way as a general partnership when it comes to regimes like the intangibles regime which depend upon the accounting treatment.

Read the decision

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Substance (continued)

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Armajaro Holdings Limited v HMRC [2013] UKFTT 571 (TC)

Although the acquisition by a company of a controlling interest in an LLP is treated as the acquisition of a partnership interest for corporation tax purposes, because it would not be treated for accounting purposes as the acquisition of an interest in an intangible fixed asset of the LLP, no tax deduction was available for the company under the intangibles regime for the goodwill of the LLP.

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The FTT considered a scheme where a Lender lent money to a Borrower for a commercial purpose of the Borrower, but directed that instead of paying interest, the Borrower should issue preference shares to another group company (the Share Recipient). The plan was that the Borrower would get a deduction for interest, but neither party would be taxable on the receipt of the interest. HMRC argued that the Lender or the Share Recipient should be subject to tax on the interest. This case was the lead case for the scheme, which has been used by a number of other groups.

HMRC argued that the value of the shares issued to the Share Recipient formed part of the profits of the Lender under the loan relationship provisions in Finance Act 1996 on the ground that the accounts were incorrect in that the correct and only application of GAAP required the Lender to recognise interest income on the loan. HMRC also argued that alternatively the Lender was taxable under section 786(5) ICTA 1988.

HMRC said that if the Lender was not taxable, then the value of the shares should form part of the profits of the Share Recipient under Schedule D Case VI. It also argued that the unallowable purposes test in para 13, Sch 9 FA 1996 meant that the deduction was not available for the Borrower.

The FTT heard expert advice from both parties on whether the accounting treatment of the Lender was in accordance with GAAP. This depended on FRS 5 which required the Lender to determine the substance of the lending transaction and to report the substance in its accounts. The FTT decided that the Lender’s accounts were in accordance with GAAP and therefore the loan relationship provisions did not result in a tax charge for the lender in respect of the loan.

Section 786 applies to transactions “effected with reference to the lending of money or the giving of credit, or the varying of the terms on which money is lent or credit is given”. It provides for a tax charge under Schedule D Case VI if “under the transaction a person assigns, surrenders or otherwise agrees to waive or forgo income arising from any property (without a sale or transfer of the property)”. HMRC argued that as a lender would usually be entitled to interest, in directing that the interest be paid to the Share Recipient, the Lender was foregoing income.

The FTT said that the transaction for the purposes of section 786 was the issue of shares to the Share Recipient and not the loan itself. The fact that the Lender lent to the Borrower on terms that shares would be issued to the Share Recipient could not therefore be regarded as the forgoing of income under any relevant transaction for section 786 purposes. In relation to the issue of the shares by the Borrower to the Share Recipient there is no forgoing by the Lender of anything and so section 786 could not apply.

The FTT however dismissed the taxpayer’s arguments that section 786 should be interpreted with regard to the particular schemes it was intended to counteract. “We do not accept that this evident mischief to which the provisions appear to have been aimed can delineate the scope of s 786. Nor do we consider that statements made by the Revenue on its practice in relation to the application of s 786 can have any relevance. It remains necessary to construe that provision according to its terms” the judges said.

The Share Recipient was not party to the loan and so the loan relationship rules could not apply to it. However for Schedule D VI to apply it was argued that the income had to have a source. The FTT decided that the Borrower did not make a gift when it issued the shares to the Share Recipient because it was under a contractual obligation to do so, albeit not to the Share Recipient. The FTT decided that the source of the income was the loan agreement and the Share Recipient was therefore taxable on the value of the shares issued, under Case VI of Schedule D.

The FTT did not need to look in detail at para 13 but it did consider HMRC’s unusual argument that the FTT did not need to consider all the facts of the transactions and could rule on whether there was an unallowable purpose on the basis of three facts being:

•The only reason for the borrowing’s design, structure and terms was to obtain a tax advantage for the Lender and/or Share Recipient

•The Lender, the Share Recipient and the Borrower all knew at the time of entering into the borrowing that the borrowing was designed and structured so that the Lender and/or the Share Recipient would obtain the tax advantage

•The Borrower had a commercial need for the borrowing.

Substance (continued)

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Versteegh & Others v HMRC

A scheme whereby a Lender lent money to a Borrower, but directed that instead of paying interest, the Borrower should issue preference shares to another group company did not result in a tax charge for the Lender but the recipient of the shares was taxed under Schedule D Case VI on the value of the shares received, even though it was not party to the loan.

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The judges said that these facts were not enough to establish that para 13 applied. A full factual enquiry would be needed. “In the same way that the mere presence of a commercial purpose cannot rule out the existence of tax avoidance as being a main purpose, the mere existence of a tax advantage, known to the taxpayer, does not on its own render the obtaining of that advantage a main purpose “ the judges said.

CommentThis case includes some very useful guidance. In particular it gives guidance on the FTT’s preferred approach to FRS 5 and stresses that HMRC can only overturn accounts if it can show that the only permissible GAAP treatment is the one HMRC prefers.

In relation to section 786 there is a useful narrowing of the potential scope. This is an odd provision which is a hangover from earlier rules and has never sat well with the loan relationship regime.

The case also gives an interesting interpretation of Schedule D Case VI which was used to tax a ‘profit’, being the issue of shares to a company which was not party to the loan and therefore could not be taxed under the loan relationship rules.

The FTT declined to rule on the unallowable purposes test without a full analysis of the facts. In the judges’ view para 13 will not necessarily apply even where it is clear that the “only reason for the design, structure and terms of the loan was to obtain a tax advantage for the Lender”.

Read the decision

Substance (continued)

Mr and Mrs Rumbelow appealed against assessments to both income and capital gains in respect of the years 2001 to 2005 when they claimed that they were non-UK resident (and so not subject to UK income or capital gains tax).

The Rumbelows submitted that they left the UK in 2001 to live permanently overseas to retire and to improve the quality of life. They rented a house in Belgium and eventually bought a house in Portugal. They claimed that there was a substantial loosening of family, social and business ties so as to amount to a distinct break from the UK and when they returned to the UK they did so only as visitors. This was despite leaving their youngest daughter behind who was only 15 years old, retaining their UK home which they stayed in when they came back to the UK and regularly returning to the UK to look after their business interests.

The case was determined on the basis of common law principles of residency (in particular looking at the Supreme Court decision in the Gaines-Cooper case) and the guidance of HMRC in its booklet IR20. The FTT said that it was important to consider all the evidence - it was not just a counting exercise (to determine the number of days spent in the UK in any given tax year) as envisaged by booklet IR20. Confirming that “it is not simply about where they were, but more importantly their reasons for being there and how that fits into the pattern of their lives.”

The FTT was not convinced that the Rumbelows had made a distinct break in the pattern of their lives such as to lose their UK tax residency. The FTT agreed with HMRC that when the Rumbelows returned to the UK they were not merely travellers. The fact that Mr and Mrs Rumbelow returned frequently to see their youngest daughter and stayed with her in their own property which was furnished and maintained supported the view that the loosening of ties was not sufficiently substantial. The FTT recognised that the Rumbelows needed to return to the UK to wind down their business and property interests but considered that their

business ties to the UK remained strong. The FTT considered that the return trips by way of business also served the dual purpose of maintaining their social and family ties.

The crucial factor in this case was that Mr and Mrs Rumbelow were unable to produce contemporaneous records (or indeed supporting evidence generally) as to their whereabouts or their visits to the UK so that it was very hard for the FTT to be satisfied from the evidence where they were. The FTT confirmed the position that the onus was on the Rumbelows to satisfy the FTT by the evidence how their pattern of life changed after they left the UK and where they spent their lives in the tax years in question, but they were unable to do so. This was the case despite the fact that the Rumbelows had taken specialist tax advice from Arthur Andersen on the proposed move (although Mr and Mrs Rumbelow were unable to produce the advice which they received and it was put into effect in a “casual manner”).

The FTT dismissed Mr and Mrs Rumbelow’s appeal.

CommentThis case was decided on the common law provisions and old HMRC guidance on tax residency, which has now been replaced by a statutory residence test. However, there are some fundamental principles which are still important for proving tax residency. Firstly, it is the taxpayer’s burden to prove that he/she is non-UK resident for a particular tax year. This means severing as many ties with the UK as possible and, crucially, keeping documentary evidence of periods spent in the UK. Keeping a contemporaneous diary of all the relevant dates, places stayed, travelling undertaken and reasons for the return trips to the UK can be helpful in this regard.

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Rumbelow and Another v HMRC [2013] UKFTT 637 (TC)

Individuals did not sever enough ties with the UK and were unable to produce sufficient evidence to support their case that they had become non-resident for UK tax purposes.

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Substance (continued)

Aberdeen Asset Management (AAM) entered into a tax avoidance scheme designed to pay significant sums of money, tax free, to senior employees and directors. The key steps were as follows:

•AAM established an offshore employee benefits trust (EBT) of which the beneficiaries were senior employees or directors who were to be rewarded for past performance.

•AAM transferred substantial sums of money into the EBT.

•For each employee who was to be benefitted by the arrangement (a participant), an Isle of Man company (referred to as a ‘cash-box’ or ‘money-box’ company) was incorporated with a share capital of £2.

•The EBT subscribed the 2 shares for each cash-box company, 1 paid at par and 1 paid for a substantial premium representing the amount of money due to the relevant participant.

•At the same time, a family benefit trust (FBT) was established by the EBT for each of the participant and each cash-box company granted an option to the corresponding FBT over a further 10,000 new shares, intended to dilute the value of the 2 original shares.

•The 2 original shares were then transferred to the participants, who had the ability to benefit from the funds in the companies by reason of their ownership of the shares in them.

The FTT held that the scheme was not effective to avoid income tax, in particular on the basis that the option granted to the FBT did not have the effect of reducing the value of the shares in the cash box companies which were transferred to the individuals. The value transferred at this point was therefore subject to income tax. AAM accepted that the scheme had failed, but appealed to the UT on the conclusion that the income tax due should have been collected by AAM under the PAYE regime.

The UT concluded that the transfer of the shares was not a ‘payment’ for PAYE purposes, however, as the shares were ‘readily convertible assets’ (on the basis that the participants were in a position to obtain a cash amount similar to the expense incurred in providing the shares) and so the income tax should nevertheless have been collected under PAYE.

AAM appealed the decision on whether or not the shares were readily convertible assets, and HMRC cross-appealed on the point of whether the shares did in fact amount to a ‘payment’ for PAYE purposes.

The Court of Session first considered whether there was a ‘payment’ to each participant on the basis of key principles emerging from the line of authority following the Ramsay case, and as summarised in Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1. On this basis, it took the approach that statutes should be interpreted in accordance with the normal principles of statutory interpretation, with the Court not being confined to a literal interpretation, and with the words used in the statute being considered in the context of the relevant statutory provisions taken as a whole, including the purpose of those provisions. As a second principle, the Court was to ascertain the legal nature of any transaction and, if that involves considering a series of transactions, it is the whole series that must be considered. In particular, the Court of Session considered the Arrowtown case (Collector of Stamp Revenue -v- Arrowtown Assets Limited ) in which it was stated that “the ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically”.

It was noted that the term ‘payment’ in the relevant legislation was not defined but was a practical commercial concept in the context of the provisions in which it was used. Lord Drummond Young identified the crucial question as being “whether funds were placed in a position where, as a practical matter, they may be spent by the employee as he wishes; it is at that point that the employee can be said to obtain the benefit of those funds”. Based on the findings of fact by the FTT, it was concluded that the point at which the shares were transferred to the participant was the point at which the participant effectively obtained the benefit of those funds, notwithstanding that additional actions were required in order for the employee to actually receive the cash itself. The term ‘payment’ itself was not concerned with the nature of a narrow legal right (i.e., whether share or cash were transferred) and that in the context and the commercial whole of the circumstances, the cash was at the employee’s disposal at the point the shares were transferred (noting that the directors of the cash-box company, appointed from the same entity as the EBT/FBT trustees, would act in accordance with the individual’s wishes, or alternatively the participant could appoint substitute directors). It was also observed that being the sole owner of

Aberdeen Asset Management plc v HMRC [2013] CSIH 84 XA100/12

When shares in ‘cash box’ companies were transferred to employees as part of an income tax avoidance scheme, that transfer amounted to a ‘payment’ for PAYE purposes.

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the entire share capital of a company which had a sole asset consisting of cash was not dissimilar to having funds in a bank account and needing to write a cheque or take other relevant action to extract the money from that bank account.

Therefore, the transfer of shares was not of itself the reward, but was effectively a means to an end - i.e. accessing cash. On that basis, the transfer of the shares should be regarded as a ‘payment’ for PAYE purposes.

Having decided that point, the Court of Session did not need to make a determination on the AAM appeal as to whether the shares were ‘readily convertible assets’. However, for completeness, the Court did comment on this point and confirmed that they agreed with the decision of the UT on that issue.

CommentThis decision does not change the position in relation to the efficacy of the scheme, as it had already been accepted that it had not been effective to avoid tax. In any event, subsequent legislation has ensured that this type of planning would not be effective. However, the decision confirms the PAYE position and contains some useful observations and commentary in relation to the Court’s approach to statutory construction, and in particular the potentially broad meaning of the term ‘payment’ within the PAYE legislation.

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Substance (continued)

Mr Vaines was a member of a UK law firm established as a limited liability partnership (LLP). He had previously been involved with a German law firm which had collapsed owing money to a bank. He made a payment of €300 to the bank in settlement of all its claims against him and claimed a deduction against his income from the UK law firm for the payment made to the bank. Mr Vaines made the payment because he thought that the risk of challenging the German bank through the German courts was unacceptably high because, if the bank was successful, he would be made bankrupt and would then lose his partnership in the UK firm.

HMRC refused to allow the deduction arguing that Mr Vaines did not carry on, as an individual, a trade, profession or vocation. It argued that the LLP was carrying on the trade. In the alternative, HMRC argued that if Mr Vaines was carrying on a trade, the expenditure was not wholly and exclusively for purposes of a trade or was capital in nature.

The FTT agreed with Mr Vaines that he was carrying on a trade and that each partner in the LLP was carrying on a trade albeit collectively with others.

The FTT said that as the purpose of Mr Vaines in making the payment was to preserve and protect his professional career or trade the payment was deductible as the case of Morgan (Inspector of Taxes) v Tate & Lyle Ltd [1955] AC 21, 35 TC 367 established that money spent for the purpose of preserving the trade from destruction can properly be treated as wholly and exclusively expended for the purposes of the trade. The FTT also dismissed the argument that the payment was capital in nature as, if it was to preserve and protect Mr Vaines professional career or trade; it was clearly revenue and not capital in nature.

Mr Vaines’ appeal was therefore allowed.

CommentAnother case looking at how the tax rules apply to an LLP (see also Armajaro Holdings Limited v HMRC, mentioned above). It is quite a generous interpretation of the wholly and exclusively test and essentially allows a liability in respect of a previous occupation to be set against a current trade.

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Peter Vaines v HMRC [2013] UKFTT 576 (TC)

A payment made by a member of a law firm established as an LLP to prevent him being made bankrupt was a deductible expense in respect of his income from the LLP as he was carrying on a trade and a payment to preserve his professional career was revenue in nature and made wholly and exclusively for the purposes of his trade.

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Forthcoming Seminars

PM-Tax | Events

The Chancellor of the Exchequer’s Autumn Statement will now take place this year on 5 December. It was originally going to be on 4 December but was put back by 24 hours to enable the Prime Minister to return from a trip to China in time to be present.

To discuss some of the key themes of the speech and to provide crucial insight into the tax implications of measures announced, Pinsent Masons is hosting a breakfast seminar on the morning of 6 December 2013.

We are delighted to confirm an expanded panel of experts for the revised date. Members will include:

•Mike Truman, Editor of Taxation (Chair)

•Greg Hands MP, Deputy Chief Whip and Former Parliamentary Private Secretary to the Chancellor of the Exchequer

•Judith Freedman, Pinsent Masons Professor of Taxation Law, Oxford University

•James Bullock, Tax Partner and Head of Litigation & Compliance Group, Pinsent Masons

•Eloise Walker, Tax Partner, Pinsent Masons.

Join us to digest the speech and to discuss what the Autumn Statement really means for business and the wider economy.

Date: Friday, 6 December 2013

Time: Breakfast served from 8am; Seminar commences at 8.30; Seminar ends 10am

Venue: Pinsent Masons LLP, 30 Crown Place, London, EC2A 4ES

To find out more or book a place, please contact Alistair McVan

Autumn Statement Breakfast Seminar

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Celebration of Oxford University Chair in Tax law

On 7 November a large group of tax professionals and academics gathered in our Crown Place offices to celebrate the appointment of Judith Freedman CBE to the newly-founded Pinsent Masons Chair in Taxation at the University of Oxford. Joining in the celebrations with champagne and canapés, were tax directors, accountants, members of the tax bar, lecturers and students from Oxford University as well as tax professionals from Pinsent Masons.

James Bullock, head of litigation and compliance at Pinsent Masons began by welcoming everyone and explaining that since 2004, Pinsent Masons and its predecessor firm, McGrigors, has supported the Law Faculty at Oxford through sponsorship. In addition to the Chair, Pinsent Masons also has its name attached to a University Lectureship in Taxation Law, currently held by Dr Glen Loutsenhizer.

James explained that Professor Judith Freedman has held the Chair in Taxation Law since 2001, having previously held the Chair of Taxation Law at the London School of Economics. She is a Fellow of Worcester College, Oxford and in addition to her academic role she is one of the most prominent commentators on Tax policy and practice both in the UK and internationally and the Editor of the British Tax Review. Judith was also a member of the panel advising the government on the introduction of the General Anti-Abuse Rule, which came into force in July 2013. She is a founder and co-Director of the Centre for Business Taxation at the Said Business School at the University of Oxford.

Professor Timothy Endicott, Dean of the Law Faculty at the University of Oxford and Fellow of Balliol College then said a few words. He thanked

Pinsent Masons for their support and praised Judith Freeman for her skill in bringing people together. He commented that tax law deserved to be recognised as a mainstream academic discipline and praised Judith for her efforts in bringing this about.

Judith Freedman thanked Pinsent Masons and all those who had supported the faculty over the years, many of whom were present. Judith was keen that we should all remember the fact that Professor John Tiley, who died earlier this year, had been instrumental in promoting the study of tax law as an academic subject.

Ian Barlow, Chairman of HM Revenue & Customs then spoke. Mr Barlow, in his previous capacity as Head of Tax at KPMG in the UK, was instrumental in helping the University of Oxford to establish the Chair in Taxation. He echoed the comments about the importance of the study of tax law and stressed the importance of HMRC and the tax profession working together in terms of tax training.

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Chambers and Partners UK Guide

We were delighted to receive excellent recognition for our tax team in the 2014 edition of Chambers and Partners’ guide to the UK’s best lawyers.

UK wide our tax disputes practice is ranked in band 1. A client said “They are very serious players – a leading contentious tax firm. They have very good and experienced people. They know what they’re doing.” Another client said “Client service was excellent. They came back to us very quickly with everything we wanted.”

Head of Litigation & Compliance James Bullock is described as “very prominent in the contentious tax arena” and “noted for his strong experience of complex disputes with HMRC.” The guide says “he has an outstanding market reputation for all contentious tax matters, including HMRC enquiries and investigations”. Another client notes “he’s a great lawyer and I would follow him wherever he would go.”

Head of Tax Jason Collins “thinks well strategically” and is considered “a market-leading lawyer for all contentious tax fraud matters, including MTIC fraud”. Stuart Walsh was mentioned as routinely working with blue-chip clients on disputes with HMRC concerning both direct tax and VAT.

UK wide our share plans and incentives practice is very highly rated. Clients say “They are responsive and creative. They know the requirements of this field and their output is very impressive.” and “They’re very strong: we dealt with them in one deal and they asked the right questions throughout.”

Head of Department Judith Greaves is highlighted as a “formidable” practitioner and, in the words of one client, for her “outstanding knowledge of share schemes.”

Matthew Findley is described as “a highly experienced practitioner with a strong grasp of issues pertaining to the share scheme arena.”

Associate Amy Carter who recently joined the firm from Allen & Overy LLP is perceived to be a “very knowledgeable and approachable” practitioner. She is further commended for the “accuracy and quality of her work.”

On corporate tax in London the guide says “The firm was focused on explaining issues and then recommending the best solution.”

Eloise Walker is described by clients as “outstanding – strong technically, commercially very sensible, and worked very hard to ensure excellent client service.” She has particular expertise in the financial services sector.

In Birmingham Head of Tax Ian Hyde is “well reputed among market sources as a strong corporate tax adviser and tax litigator.”

In Scotland, Karen Davidson is regarded as a first port of call for many clients on corporate tax matters, as well as share incentives. She is described as “prompt and pragmatic” by satisfied clients. On share plans Karen earns acclaim for “her technical acuity and personable demeanour” Christine Yuill “combines an excellent technical grasp with great commercial acumen,” say interviewees.

One client says of the Scottish team on a share plans matter “I think they’ve been brilliant. They’re really easy to deal with and the speed of delivery has been excellent.”

A client says of the Leeds team, “They are very approachable and responsive – good people to work with” and another client says “They are playing on a national scale.”

Head of corporate tax John Christian “handles a range of corporate tax matters, including M&A, restructurings, and funds and property-related work”. Clients note that he “is a skilful negotiator, provides excellent real time technical support, and is very calm under pressure.”

In Manchester, where Lynette Jacobs heads up the tax team, a client says “We were happy with the service received. They didn’t waste time, and had the right people working for the right length of time.”

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Please send any comments, queries or suggestions to: catherine.robins@pinsentmasons.com

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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 2013.

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