pm-tax wednesday 15 january 2014 - pinsent masons · wednesday 15 january 2014 in this issue news...

Wednesday 15 January 2014

In this Issue

News and Views from the Pinsent Masons Tax teamPM-Tax

Our Comment• The latest PAC report on HMRC’s accounts by Heather Self• Entry into force of double tax agreement between China and the UK by Robbie Chen• Proposed Scottish tax collection framework by Karen Davidson

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Recent Articles• Important tax changes affecting partnerships by John Christian and Tom Cartwright• Advocate General’s Opinion in ATP Case by Darren Mellor-Clark• First-tier Tribunal considers TOGCs and the interaction with VAT grouping rules by Suzanne McMahon and Darren Mellor-Clark

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Our perspective on recent casesProcedure• Sanderson v HMRC [2013] UKUT 0623 (TCC)• HMRC v Anthony Bosher FTC/3/2013

• Test Claimants in the Franked Investment Income Group Litigation v HMRC C 362/12

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Substance• Eclipse Film Partners (No. 35) LLP v HMRC [2013]

UKUT 0639 (TCC)• McCarthy & Stone (Developments) Ltd and another

v HMRC [2013] UKFTT 727 (TC)

• Robert Brown v HMRC [2013] UKFTT 740 (TC)• Iveco Ltd v HMRC [2013] UKFTT 763 (TC)• HMRC v Bridport and West Dorset Golf Club Limited C-495/12

Events 21 People 22

© Pinsent Masons LLP 2014

@PM_Tax

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PM-Tax | Wednesday 15 January 2014

PM-Tax | Our Comment

The Public Accounts Committee (PAC) risks becoming seen as a politically motivated body rather than a scrutiniser of public spending, after its latest report on the accounts of HM Revenue and Customs (HMRC) devoted considerable space to the criticism of Government policy.

In its report published last month, the PAC said that HMRC had “not considered adequately the impact” that changes to the tax regime designed to make the UK more attractive to businesses would have on their behaviour. It said that the CFC regime had been “weakened” and now incentivised UK companies to move their finance operations offshore, while multinational companies could also use the Eurobond rules to lend money to their UK subsidiaries via low-tax jurisdictions and offset the interest payments against their UK profits.

PAC Chair Margaret Hodge MP said “Changes in the controlled foreign company rules and the failure to close the loophole created by Eurobonds are two examples showing where it has become easier for companies to avoid tax while ordinary people continue to pay their share. If that is HMRC’s real intent, then it should be open about it. When designing the tax regime for businesses, HMRC needs to strike the right balance between support and enforcement”.

These comments ignore the fact that it is the Government, and not HMRC, which is responsible for the design of the tax system. The Government has a clear policy of having a relatively generous regime for interest relief, backed up by anti-avoidance rules. Reform of the CFC rules was a key part of the Coalition’s ‘corporate tax roadmap’, designed to make the UK’s tax system more competitive and to stem the tide of international companies moving their headquarters away from the UK.

Continually criticising HMRC for areas for which it is not responsible is not helpful, as it does not inform public debate and undermines HMRC. It also risks the PAC’s work being seen as politically motivated. The PAC can, and should, question how rules are applied but it is not up to HMRC to change those rules.

The PAC also criticised HMRC for the methods it used to calculate the annual ‘tax gap’, a rough measure of the difference between the amount of tax owed to HMRC and the amount actually collected. It said that by not gathering information about how much potential tax revenue is lost through “aggressive tax avoidance schemes”, HMRC underestimated the amount of money actually lost to the Exchequer.

However, as HMRC pointed out in its response to the report, the published tax gap does include a measure of the tax lost from avoidance, as well as evasion, but it can only measure non-compliance with existing tax law – it cannot estimate how much tax might be due if tax laws were different.

“HMRC can only bring in the tax that is due under the law and we cannot collect what is not legally due, however much the Committee might want us to,” HMRC said. “The Public Accounts Committee already knows that we cannot prosecute multinational companies for activities that are lawful within the international tax framework and has itself acknowledged that the kinds of international tax planning by large businesses that it has reviewed are lawful.”

There were, however, some areas of the report where criticism of HMRC was justified. For example, the PAC criticised HMRC for “massively overestimating” how much it could collect from UK holders of Swiss bank accounts under the agreement between Switzerland and the UK that came into force on 1 January 2013. In the 2012 Autumn Statement, the Treasury estimated that £3.12 billion in unpaid tax would be collected in 2013-14; however, the PAC noted that the department had only collected £440 million to date.

by Heather Self

The latest PAC report on HMRC’s accounts

http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/666/66602.htm

https://www.gov.uk/government/news/hmrc-responds-to-pac-report

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The latest PAC report on HMRC’s accounts (continued)

It is right for the PAC to challenge why the estimates were so far out, and to seek explanations. The forecast may simply have been wrong – it was always going to be difficult to estimate the extent of something hidden from HMRC. In addition more people may have opted for disclosure rather than the automatic withholding arrangements and many will have used the Lichtenstein Disclosure Facility (LDF) to disclose irregularities. Some account holders will have had no UK tax due as they are non-doms, and some money may have been moved on elsewhere.

The PAC also made some constructive comments in relation to the roll out of real time information (RTI), recommending more support for small businesses and improved provision for disaster recovery to ensure that correct payments to claimants will continue in the event of a system failure. These are areas where the PAC should be commenting.

The PAC does a useful job in ensuring that Government money is spent wisely. It is right that it should enquire into the efficiency of HMRC. However, a large part of its questions on this occasion – and some of its key conclusions – relate to Government policy and not the administration of the tax system.

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: [email protected]: +44 (0)161 662 8066

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The new double taxation agreement (DTA) between the UK and China has now come into force, two years after being signed by the two countries.

The DTA is based on a 2011 treaty and will replace the existing double taxation convention between the UK and China, which came into force in 1984. It is largely consistent with the model double tax convention produced by the Office for Economic Co-ordination and Development (OECD). It updates provisions in relation to capital gains, and introduces more modern information exchange arrangements.

One of the major changes introduced by the new DTA is a reduction in the amount of withholding tax payable to the Chinese tax authorities when dividends are paid to UK investors with shares in Chinese companies. The agreement reduces the maximum dividend withholding tax rate from 10% to 5% where the investor directly beneficially owns at least 25% of the capital of the dividend-paying company.

The new DTA has also deleted the controversial ‘technical fee’ article under the old treaty, and provides a clearer definition of permanent establishment (PE). Under the old treaty, China, as the source country, can tax income arising from China even though the provision of services by a UK company does not create a PE in China, if the income is regarded as payment for services of a technical, supervisory or consultancy nature. In practice, some local Chinese tax authorities had taxed the profit earned by a UK company from China based on the technical fee article. Now with the inclusion of a clear service PE concept, UK companies can prevent income tax exposure in China, provided that the duration of the onshore service does not exceed 183 days in any 12 month period.

As regards the treatment of capital gains, the new DTA also provides a UK investor the chance to be exempt from income tax in China for selling shares of a Chinese company, if the UK investor directly owns less than 25% in the Chinese company being sold at any time during the 12 month period preceding the disposal. Under the old DTA, China generally has the taxing right for China sourced capital gains.

The new DTA is very much to be welcomed and will make the UK one of the most favoured jurisdictions for inbound investment from China, alongside Hong Kong and Singapore.

The DTA will apply in respect of profit, income and capital gains arising in any tax year beginning on or after 1 January 2014 in China, according to HMRC. In the UK, it will apply to income and capital gains taxes for any year of assessment beginning on or after 6 April 2014; and to corporation tax for any financial year beginning on or after 1 April 2014.

Robbie Chen is a senior associate based in our Shanghai office. As a CPA and Chinese lawyer, Robbie provides tax services on foreign direct investment, corporate restructuring, cross border M&A, and tax planning for companies and individuals. Robbie also gives VAT and customs advice in relation to import/export, bonded areas, and processing trades.

E: [email protected]: +86 21 6138 2527

Entry into force of double tax agreement between China and the UK by Robbie Chen

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The new independent body responsible for the collection of devolved Scottish taxes would be given tough anti-avoidance powers under draft legislation published by the Scottish Government.

Under the Scotland Act 2012, the Scottish Parliament will be able to introduce and manage taxes on the disposal of waste to landfill, and on the purchase or leasing of land and buildings, from April 2015. The existing UK landfill tax and stamp duty land tax (SDLT) will be ‘switched off’ in Scotland in April 2015, together with a corresponding reduction in the ‘block grant’ Scotland receives from Westminster.

The new Revenue Scotland and Tax Powers Bill provides a legal framework for the collection of the two taxes that will be devolved from April 2015, and gives this responsibility to a new tax authority, Revenue Scotland. Scottish Finance Minister John Swinney said that the new bill set out a “distinctly Scottish approach to taxation, including a vigorous approach to combating tax avoidance”.

The bill sets out the powers and duties of Revenue Scotland, including its ability to delegate some functions to Registers of Scotland and the Scottish Environmental Protection Agency (SEPA). Revenue Scotland will not be responsible for the collection of existing locally-collected taxes, including council tax and non-domestic rates; and will not collect the Scottish Rate of Income Tax, which will be collected by HM Revenue and Customs (HMRC) from April 2016.

The Scottish Government has chosen not to adopt the UK’s approach to a general anti-abuse rule (GAAR). The bill contains a tough new anti avoidance rule, intended to counteract artificial arrangements designed to gain a tax advantage. By contrast, the GAAR that took effect in the UK last year is designed to prevent taxpayers from receiving tax advantages as a result of tax arrangements that are ‘abusive’, defined as arrangements that HMRC can show “cannot be reasonably regarded as a reasonable course of action”. The GAAR is overseen by an independent GAAR Advisory Panel, which oversees HMRC guidance on the application of the rule and provides non-binding opinions on cases where HMRC considers that it may apply.

Perhaps it is not surprising that the draft legislation adopts a wider anti-avoidance provision, given that a sizeable chunk of Revenue Scotland’s remit will be Land and Buildings Transaction Tax (LBTT): the new Scottish equivalent of SDLT, which has been an area ripe for avoidance in the UK. Although, much avoidance activity has centred on the SDLT sub-sale provisions, which the new LBTT in its current format does not contain. However, the ‘Scottish GAAR’ will lay the foundations of a system which will apply to future devolved taxes – and could, in theory, set the tone for any tax system adopted in the event of a ‘yes’ vote in the independence referendum in 2014.

Few would argue that Revenue Scotland should not have the power to counteract those transactions which cross the line of acceptability, but judging where that line sits is no easy task. It is likely that there will be pressure to include in the bill more protection for taxpayers, perhaps in the form of a UK-style independent panel.

Karen Davidson is a legal director based in our Glasgow office and specialises in corporate and business tax as well as advising in relation to employee share incentive arrangements. Her experience includes advising on the tax aspects of corporate mergers, acquisition disposals, joint venture arrangements and reorganisations. In addition she advises on the design, establishment and operation of share incentive arrangements and the implications of corporate transactions on such arrangements.

E: [email protected]: +44 (0)141 567 8535M: +44 (0)7738 892122

Proposed Scottish tax collection frameworkby Karen Davidson

http://www.scottish.parliament.uk/parliamentarybusiness/Bills/70929.aspx

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by John Christian and Tom Cartwright

Important tax changes affecting partnerships

PM-Tax | Recent Articles

The Government has published the draft legislation for its proposals. The proposals have changed from those previously suggested and in particular the changes affecting LLPs with ‘salaried’ members will catch many more partnerships than was originally proposed.

LLPs – treatment of ‘salaried’ members Members of LLPs who “work for the LLPs on terms that are tantamount to employment” will be treated for income tax and national insurance purposes from 6 April 2014 as if they were employees. This will increase the cost for the firm by making the remuneration of such members subject to employer’s national insurance contributions at 13.8%.

An individual member of an LLP will be treated as an employee of the LLP for tax purposes if all of Conditions A to C are satisfied.

Condition A: Disguised Salary – does the individual have a disguised salary? Condition A applies where the individual performs services for an LLP in his or her capacity as a member and it is reasonable to expect that the payment for the services of the individual will be wholly or substantially wholly fixed. This is referred to as the ‘disguised salary’.

‘Substantially wholly’ is not defined in the legislation but HMRC considers this condition to be met if 80% or more of the monies paid to the individual take the form of a disguised salary. Also, the term ‘reasonable to expect’ means that rewards that are unrealistic and unlikely ever to be triggered are ignored for the purposes of this condition.

This condition is not met if it is expected that the member will be largely rewarded by a share of the profits of the LLP. This profit share must be by reference to the business as a whole and significantly, a bonus or profit share based on personal or team performance is not a profit share and will be treated as part of the ‘disguised salary’.

Condition A is applied on 6 April 2014, or if later when an individual becomes a member of the LLP. It is based on a reasonable expectation at that date and is only applied again if the contractual terms change. It is not revisited with the benefit of hindsight.

Condition B: Significant Influence – does the individual have no significant influence over the business? Condition B is that the mutual rights and duties of the members do not give the individual ‘significant influence’ over the affairs of the partnership.

This condition is not referring to voting rights or influence over separate component parts of the business, but a ‘hands-on’ management role in relation to the business as a whole. In larger partnerships, unless the individual is a member of the management board, he or she will probably satisfy this condition. Again the test is applied at 6 April 2014 (or when the individual becomes a member of the LLP, if later), and once applied, the test is not re-visited unless circumstances change.

Partnerships need to be aware of changes to the tax regime, which are due to take effect from 6 April 2014.

Changes have been announced which could affect: • Limited Liability Partnerships (LLPs) with partners whose terms are more akin to employment than self

employment (‘salaried’ members), including those whose remuneration is not substantially dependent upon the profits of the partnership

• Partnerships (whether LLPs or not) with mixed members e.g. corporate as well as individual members • Partnerships managing alternative investment funds • Those disposing of assets or income streams through partnerships.

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Important tax changes affecting partnerships (continued)

Condition C: Contribution to the LLP – has the individual contributed less than 25% of their disguised salary to the LLP? This condition deals with the individual’s level of investment in the LLP. It looks at whether the individual has a real risk if the business is a failure. The test focuses on capital investment – partnership capital and long term loans. Uncalled sums, undrawn profits, tax reserves, current accounts and short term loans are all ignored.

The test is re-applied if there is a change in the tax year, but there is no need to retest if this condition was not previously met and all that has happened is the individual has increased their contribution.

Existing LLPs with partners caught by the proposed change may want to consider restructuring. As all three conditions need to be satisfied for the rule to apply, it is only necessary to fall outside one of the conditions. Options for restructuring include: • Increasing partners’ shares in the profits of the partnership as a

whole so that the expected profit share exceeds 20% of any fixed profit entitlement – but this could not include any substantial ‘eat what you kill’ mechanics, or profits linked to particular business lines or teams

• Making all the partners contribute partnership capital of 25% or more of their fixed entitlement. This could be funded by way of loan, and the interest should be tax deductible for the individual partners, but the loan would have to be with a third party bank provider and must be full recourse.

In most cases it will not be feasible to show that the individual has substantial influence over the business of the partnership, except in the case of a small partnership or where the partner is a member of the management board.

There are also wide anti-avoidance provisions to stop arrangements designed to circumvent the rules.

Mixed member partnerships These proposals will affect partnerships which include individuals and non-individuals (such as companies). They are designed to prevent the avoidance of tax by storing profits in a corporate member, which only pays tax at the corporation tax rate (23%) rather than the top rate of income tax of 45%.

The changes will apply to mixed membership partnerships where partnership profits are allocated to a non individual, such as a company, in circumstances where an individual member may benefit.

Partners are usually taxed on the basis of the share of profit or loss allocated to them in accordance with the firm’s profit–sharing arrangements. The new rules will reallocate profits allocated to a non-individual partner to an individual partner where the non-individual’s profit share is excessive, the individual has power to

enjoy the non-individual’s share or there are deferred profit arrangements in place and it is reasonable to suppose that the individual’s share is attributable to that power or arrangements. They also apply where losses are allocated to individual members, rather than corporate members. If a partnership has a corporate member and the individual partners are shareholders in the corporate member and together control it, the individuals will be treated as having power to enjoy the corporate member’s profit share, even if each partner’s shareholding is small.

The changes are treated as having come into force on 5 December 2013, but apply for periods of account beginning on or after 6 April 2014 or for the part of a period of account beginning before that date which falls on or after 6 April. The changes are treated as having come into force on 5 December, as an ‘anti-forestalling’ measure.

AIFM partnerships Partnerships that manage alternative investment funds (AIFM partnerships) are required to subject part of the remuneration of key individuals to performance conditions and to defer when those individuals can access that remuneration.

In a welcome measure to improve the tax position of AIFM partners, it is proposed that an AIFM partnership will be able to elect to pay the tax on deferred remuneration at the additional rate of 45%, rather than the individual member being taxed on an amount he or she has not yet received. The member will then get a tax credit when the remuneration vests and any overpayment of tax may be repaid. Any securities will be treated as acquired at a base cost equivalent to the amount of remuneration they represent net of tax. This amount will be treated as the disposal consideration.

For the partnership to bear the tax the partner must allocate all or part of any ‘restricted profit’ to the partnership. The new rules will apply to AIFM partnerships which voluntarily apply the AIFM Directive, as well as those which are obliged to do so. The change will apply from 6 April 2014.

Disposals of assets through partnerships Proposed legislation will target the use of partnerships to dispose of assets or income streams in an attempt to avoid income tax. The changes attack ‘tax attribute’ schemes where the transferor and transferee have different tax circumstances, such as where one partner has losses but another does not.

The rules will apply where, directly or indirectly, in consequence of or otherwise in connection with an arrangement: • There is a disposal of an asset (in whole or part) or a right to

income by or through a partnership from a member (or a connected person) to another member

• The main purpose or one of the main purposes of one of more of the steps is obtaining an income tax or corporation tax advantage.


PM-Tax | Wednesday 15 January 2014 6198


If the rules apply the consideration given for the asset or income stream (or the market value, if the consideration is much less than market value), is taxed as income of the transferor.

Action points As most of the changes apply from 6 April 2014, partners and partnerships who may be affected need to be looking at the proposals as a matter of urgency. This is particularly the case in relation to the LLP salaried member proposals, which are significantly wider than the initial proposals. Partnerships need to consider urgently whether they need to restructure before 6 April 2014.

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.

E: [email protected] T: +44 (0)113 294 5296M: +44 (0)7831 788196

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 has worked on private equity transactions and refinancing, on opco-propco structures and specialises in all direct taxes, as well as VAT. Tom also has experience in contentious matters and resolving disputes with HMRC.

E: [email protected]: +44 (0)20 7054 2630M: +44 (0)7860 610251

Important tax changes affecting partnerships (continued)


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by Darren Mellor-Clark

Advocate General’s Opinion in ATP Case


The recent decision in PPG (C-26/12) concerned the question of who may recover VAT charged on management fees. However, ATP, like its recent predecessor Wheels (C-424/11), concentrated on whether pension funds qualify as ‘special investment funds’ per the VAT directive and so whether the management of them may benefit from exemption from VAT. The CJEU, in its Wheels decision, held that defined benefit (or ‘final salary’) schemes are not sufficiently similar to other collective vehicles (including UCITS funds, Authorised Unit Trusts and Open Ended Investment Companies) to benefit from exemption. ATP, on reference from Denmark, concentrated on defined contribution (or ‘money purchase’) schemes.

BackgroundPension provision in Denmark consists of three pillars: a public retirement scheme financed by taxation; an occupational scheme; and personal pension plans. In general, Danish occupational schemes are formed as defined contribution vehicles. This means that the employer contributes a fixed amount to the employee’s plan, with the employee then free to make further voluntary contributions. The pension payable upon retirement will depend upon the contributions made to the scheme and the performance of the investments held. Interestingly, the precise details of each scheme are negotiated collectively between the trade unions (representing the individual employers and employees) and the employers’ organisations.

ATP provided services to the schemes. However, these were not connected to the investment of the contributions made. Rather, ATP provided various services relating to administrative tasks such as providing information relating to the schemes to employers/employees and dealing with payments into and disbursements from the scheme.

The questions referred to the CJEU boiled down to: a) whether the term ‘special investment fund’ should be interpreted to include a defined contribution pension scheme; b) if the answer to this is ‘yes’, whether the service provided by ATP constitutes ‘management’ for directive purposes; and c) essentially, whether

the service provided was best treated as a single or multiple supply and, if the latter, then whether exemption could be found for parts of the service under the exemptions dealing with payments or the operation of deposit and current accounts.

AG Cruz Villalon focussed on the first question in his opinion, considering that the CJEU is more than capable of dealing with the other questions without his guidance.

Is a defined contribution scheme a ‘special investment fund’?In a thorough and considered opinion, the AG summarised the usual considerations around this frequently debated issue, namely that:• Definition of which type of collective schemes qualify as “special

investment funds” is a matter for member state discretion• The parameters of that discretion are set by EU law to provide

legal security of definition and consistency. In effect, EU law sets an inner and outer limit for the definition

• The parameters are set by the wording of the exemption provision; its purpose; and general principles such as fiscal neutrality.

In considering the parameters the AG opined as follows: The variance in wording of the provision between different language versions of the VAT directive has caused confusion as to the degree of overlap with vehicles constituted under the UCITS directives. This confusion should have been laid to rest in the Wheels decision which clearly stated that UCITS vehicles are ‘special funds’ for these purposes. Thus UCITS funds comprise a minimum class of special investment fund.

The purpose of the exemption has been divined over several cases and is now generally accepted as being to facilitate investment in common funds for small investors. The Court has previously held that exemption is not determined by legal form of the fund nor by questions of operation such as whether the fund is open (i.e. variable capital) or closed ended (i.e. fixed capital).

Shortly before many of us departed for Christmas, Advocate General Cruz Villalon released his opinion in ATP PensionService A/S v Skatteministeriet C-464/12 (ATP). There has been much speculation and recent case law concerning pension funds and this opinion adds significantly to the debate.

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Advocate General’s Opinion in ATP Case (continued)

In considering fiscal neutrality (i.e. whether the differing products are sufficiently comparable as to place them in competition with each other and thus requiring the same VAT treatment) the AG considered the concerns of Advocate General Sharpston in Deutsche Bank (C-44/11). Namely that when analysing whether there is a competitive relationship, which requires the imposition of the same VAT treatment, there is a danger of eliminating all differences in VAT treatment as there will always be a degree of overlap between parties partly in competition. AG Cruz Villalon opined that such a danger may be eliminated by use of a comparator against which to compare the putative competitor. To identify special investment funds, the appropriate comparator is a UCITS compliant fund.

The AG noted that occupational pension schemes do not fall within UCITS and so he considered whether the schemes are sufficiently comparable to a UCITS fund as to treat them as being in competition. He identified a number of relevant and irrelevant factors for the purposes of EU law. Among the irrelevant criteria he considered: the purpose of the investor in making contributions; the fact that the characteristics of the schemes were collectively negotiated; and the tax treatment of the contributions made into the scheme. Conversely the relevant criteria included: the fact that investor assets are pooled; that pooling allowed investors to spread risk; and that the investors bore the risk of investment return. With regard to the final criterion the AG noted in particular that it was irrelevant that the contributions were made by the employer, provided that the investor bore the risk of investment return.

Therefore, the AG suggested that the Court should rule that “special investment funds” should include occupational pension schemes where such schemes pool the assets of several beneficiaries and allow the spreading of risk over a range of securities. In particular, this should only apply where the beneficiaries/investors bear the risk of investment.

Implications for the UKAlthough this decision has been eagerly awaited, it is likely to have more impact on other member states. In the UK, many defined contribution occupational pension schemes already benefit from VAT exemption as they are organised via contracts of insurance and managed by insurance companies. Presumably this treatment explains why the earlier Wheels reference from the UK concentrated upon defined benefit schemes, which many commentators considered to be a ‘higher bar’ in terms of achieving exemption.

However, if adopted by the CJEU, the AG’s methodology of establishing UCITS compliant funds as a benchmark comparator for deciding ‘special investment fund’ status could prove useful in future instances. There are some potential wrinkles to the opinion. In particular, the requirement that an occupational scheme should spread risk over a range of securities could be problematic for some schemes. Given the UCITS comparator, such a requirement may well be axiomatic. However the fact remains that many UK schemes invest in asset classes other than transferable securities, for example commercial property.

Many schemes will have s80 claims made on their behalf by fund managers stayed behind Wheels. After the taxpayer loss in Wheels, it is our understanding that the UK Tribunal has directed that such claims are now stayed pending the judgment in ATP. Pension schemes would be well advised to ensure that managers’ claims are satisfactorily stayed on this basis and to consider making such claims should they not already be in place. It is unlikely that a taxpayer win in ATP would reverse the current loss on the defined benefit side, but given the large sums at stake prudence suggests protecting the position as effectively as possible.

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, for example: Recovery and Resolution Planning; Independent Commission on Banking; UCITS IV; and the Retail Distribution Review.

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


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by Suzanne McMahon and Darren Mellor-Clark

First-tier Tribunal considers TOGCs and the interaction with VAT grouping rules


This case will be of interest to the VAT community because it is the first time that the interaction between the TOGC provisions and the VAT grouping provisions have been considered by the courts.

BackgroundAs regular readers of PM Tax will be aware, both section 43 Value Added Tax Act 1994 (VATA) and article 5 of the Value Added Tax (Special Provisions) Order 1995 (SI 1268) (the Special Provisions Order) operate to ‘de-supply’ transactions for VAT purposes.

Section 43 VATA provides that the supplies of goods and services between members of the same VAT group are disregarded for VAT purposes. Two or more corporate bodies, established in the UK can apply to be registered as a VAT group, provided certain conditions are satisfied. One company will be appointed the representative member of the VAT group and, when a VAT group exists, the representative member of the group completes the VAT obligations for the whole group – including submitting a VAT return on behalf of the group. Although members are jointly and severally liable for VAT of the group for the time they are members of the VAT group, the representative member is principally liable for the group’s VAT. Any supplies of goods or services made to or by any member of a VAT group are treated as made to or by the representative member.

Article 5 of the Special Provisions Order requires that the transfer of a business (in whole or part) between taxable persons (or in the case of the transferee, persons liable to be VAT registered as a result of the transfer) is to be treated as outside the scope of VAT provided certain conditions (set out in the VAT legislation and HMRC guidance) are met. These conditions include a requirement that the transferee must use the transferred assets to carry on the same kind of business as was carried on by the transferor, prior to the sale. This is a particularly helpful area of the VAT legislation to businesses in terms of cashflow, because it means that the transferee does not need to fund a 20% VAT charge in relation to the price, which is especially helpful to exempt and partially exempt businesses which cannot recover all or some of this VAT as input tax. For taxable businesses, although they can recover the

VAT, it takes away the wait to claim recovery of the input tax until the next VAT return cycle.

The Facts Intelligent Managed Services Ltd intended to run a business involving deposit taking and providing e-wallets. The business provided payment services to online traders. It later returned its deposit taking and e-money issuing licences to the Financial Services Authority and became an IT managed services company to the business sector.

In 2010, the transferor decided to sell its business to Virgin Money Management Services Limited (the transferee for TOGC purposes). The transfer documentation stated that the business was transferred as a TOGC and no VAT was chargeable on the sale price. The transferee was a member of the Virgin Money VAT group, but was not the representative member. After completion of the transfer the transferee company only made supplies to another member of the VAT group.

The key argument put forward by HMRC was that as the transferee only made supplies to another member of the VAT group, and as the supplies were to be ignored for VAT by virtue of section 43 VATA, the transferee did not actually make any taxable supplies of goods or services, and therefore the correct characterisation for VAT purposes was that the business ceased to operate after the transfer. HMRC relied on the decision in University of Essex v HMRC [2010] UKFTT 162 TC, where it was stated that members of a VAT group (other than the representative member) are not treated as carrying on business on their own account.

Intelligent Managed Services contended that HMRC’s argument, if correct, would contravene the EU principles of fiscal neutrality, proportionality, equal treatment and effectiveness, and that this would result in different VAT treatment being applied to businesses with different organisational structures.

In a recent decision (Intelligent Managed Services Limited v HMRC [2013] UKFTT 741) the First-tier Tax Tribunal ruled that the transfer of a business to a transferee that was a member of a VAT group and only made supplies to another member of the VAT group could not be considered a transfer of a going concern (TOGC) for VAT purposes.

http://www.bailii.org/uk/cases/UKFTT/TC/2013/TC03119.html

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First-tier Tribunal considers TOGCs and the interaction with VAT grouping rules (continued)

The Decision The First-tier Tax Tribunal decided that the interaction of the VAT group rules with the TOGC provisions in this manner was not incompatible with the principles of fiscal neutrality, proportionality, equal treatment and effectiveness.

The Tribunal referred to the ECJ decision in Zita Modes Sarl v Administration de l’enregistrement et des domains (C-497/01) where it was determined that for TOGC treatment to apply, the business being transferred must be capable of being carried on as an independent economic activity and the buyer must intend to continue to operate the business. In light of this, and the University of Essex case relied on by HMRC, it concluded that the logical conclusion was that as the member of the Virgin Money group was only supplying services to other members of the same VAT group, and as these supplies were disregarded for VAT purposes under the section 43 VATA provisions, the transferred business therefore ceased at the point of transfer. The transferee could not be considered as carrying on the same kind of business as the transferor had prior to completion, and therefore the requirements for TOGC treatment could not be satisfied. Accordingly, VAT was properly chargeable on the consideration paid for the transfer of the business.

The First-tier Tribunal went on to say that the TOGC provisions were not distorted by their conclusion. It stated that the effect of the VAT group provisions on the transfer was “an inevitable consequence” of the UK’s implementation of the EU provisions for a potential VAT free transfer of business assets. It was of no relevance to the point that if no TOGC provisions existed, then the transfer of the business would have been subject to VAT in the normal way.

It is also interesting to note that in the course of its decision, the First-tier Tribunal dismissed the argument put forward by counsel for Intelligent Managed Services that the ‘same kind of business’ test for TOGC treatment contravened both Article 1 of Protocol 1 of the European Convention on Human Rights and Article 17 of the Charter of Fundamental Rights of the EU. It accepted that HMRC reached its decision on the basis of specific VAT legislation only, and did not have in mind any concepts that were not sufficiently precise or foreseeable.

Comment It is interesting that, again, the concepts of fiscal neutrality and proportionality are being raised in the domestic courts. This appears to be a growing trend in recent VAT cases (such as Rank Group, Dixons and Leeds City Council, which have all been discussed in recent editions of PM Tax), and we expect this to continue as a theme in 2014. First-tier Tribunals seem reluctant to engage extensively on these concepts, but should this case, and indeed others progress, we hope to see more dicta from the courts on the interpretation of these concepts in relation to VAT.

Existing VAT groups which acquire businesses with the sole intention of only making supplies to its fellow VAT group members should consider whether they can recover VAT charged on the consideration for the transfer of the business. This could impact upon whether companies join, remain or leave a VAT group, particularly if none, or only part, of the VAT in question is recoverable. This will need to be weighed against the consideration that VAT may then need to be charged on the supplies it makes to members of the VAT group. In addition, commercial considerations will need to be taken into account in determining any action to be taken as to ongoing VAT group membership.

Further, transferors should be aware of the potential impact upon their decision as to whether to charge VAT. Failure to account for output tax could lead to penalties for the transferor. In which case, prudent transferors may wish to consider warranties and indemnities from the transferee regarding the operation of the business post transfer.

The Appellant has 56 days in which it can request permission to appeal the decision of the First-tier Tribunal.

Suzanne McMahon is a senior associate specialising in both contentious and non-contentious VAT and indirect taxes. She has experience in managing complex VAT litigation before the tax tribunals and courts, including the European Court of Justice. She also has particular experience in VAT and financial services, having spent a number of years at a major international bank.

E: [email protected]: +44 (0)20 7054 2743M: +44 (0)20 7054 2743

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, for example: Recovery and Resolution Planning; Independent Commission on Banking; UCITS IV; and the Retail Distribution Review.

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

>continued from previous page PM-Tax | Recent Articles

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PM-Tax | Cases

Sanderson v HMRC [2013] UKUT 0623 (TCC)

A discovery assessment was valid even though HMRC specialists had known within the enquiry window that the individual had participated in a failed tax scheme because the disclosure in the ‘white space’ of the return did not contain enough information to make a hypothetical HMRC officer aware of an actual insufficiency of tax or to justify the making of an assessment.

Mr Sanderson used the ‘Castle Trust Scheme’ in an attempt to create a capital loss to eliminate his exposure to CGT. His 1998-99 tax return, which was not filed until February 2003, disclosed chargeable gains and stated that these were eliminated by a capital loss. The ‘white space’ on the return mentioned that the loss was part of a £1 billion loss that had accrued to the Trustees of the Castle Trust and that a small part of the loss had been purchased by Mr Sanderson.

In July 1999, HMRC obtained a list of names and addresses of individuals, including Mr Sanderson, who had participated in the Castle Trust Scheme. At that stage, Mr Sanderson’s 1998-1999 tax return had not yet been submitted, and Mr Thackeray, an HMRC officer investigating the scheme, asked for it to be forwarded to him when the District Office received it. However, it was not until autumn 2004 that Mr Thackeray became aware that Mr Sanderson’s return had been filed. The enquiry window in respect of the return had closed in February 2004 and so HMRC issued a discovery assessment. Mr Sanderson challenged the validity of the assessment. The FTT decided in HMRC’s favour and Mr Sanderson appealed to the UT.

In order to make an assessment pursuant to section 29(1) TMA an HMRC officer must ‘discover’ an insufficiency of tax. The FTT referred to the Charlton case which stated that for a ‘discovery’ “[a]ll that is required is that it has newly appeared to an officer, acting honestly and reasonably, that there is an insufficiency in an assessment.” The judge decided said that, although Mr Thackeray was aware that Mr Sanderson had used the scheme, it only ‘appeared’ to him when he had seen the return in late 2004 that there was an insufficiency, and so the discovery condition was satisfied.

Even if an insufficiency of tax is discovered, an assessment can only be made outside the enquiry window if one of two conditions is satisfied:• The insufficiency of tax is attributable to fraudulent or negligent

conduct on the part of the taxpayer or a person acting on his behalf

• At the end of the enquiry window an HMRC officer could not have been reasonably expected, on the basis of the information made available to him before that time, to be aware of the insufficiency of tax.

HMRC argued that Mr Sanderson’s accountants’ conduct had been negligent in not alerting the HMRC tax office dealing with Mr Sanderson’s tax affairs and/or amending his 1998-1999 return, when the special commissioners’ case on the Castle Trust Scheme had been decided in HMRC’s favour and the scheme promoters had decided not to appeal the decision. The UT dismissed this argument on the basis that “there is no statutory provision imposing an obligation on a taxpayer to tell HMRC about something in a filed return that he subsequently finds to be erroneous” and the return could not be amended as the time limit for so doing had expired.

However the UT decided that a hypothetical HMRC officer could not be expected, from the disclosure in the ‘white space’ on the return, to be aware of the insufficiency of tax at the end of the enquiry window. The tax return might have alerted the hypothetical officer to the fact that Mr Sanderson was using a tax scheme, but it did not contain enough information to make the officer aware of an “actual insufficiency” or to justify the making of an assessment. The judge said that an HMRC officer considering Mr Sanderson’s return could have done no more than surmise that HMRC would somewhere have other information about the Castle Trust and that, if it did, it could cast light on Mr Sanderson’s loss claim. Knowledge and information held elsewhere in HMRC could not be attributed to the hypothetical officer. The discovery assessment was therefore valid.

CommentThis is another case illustrating how high the bar is to be successful in a challenge to a discovery assessment. A QC had drafted the wording about the scheme to go on the tax return but the disclosure was not sufficient to prevent an assessment being raised outside the enquiry window.

Read the decision

Procedure

http://www.tribunals.gov.uk/financeandtax/Documents/decisions/Sanderson-v-HMRC.pdf

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Part of the process of the penalty regime requires the determination imposing the penalty to be made by an authorised officer of HMRC. However, penalties are computer generated without any human intervention and so Mr Bosher sought to argue in the UT that construction industry scheme notices served on him were not penalty notices at all. This point had not been raised in the FTT.

The UT acknowledged that it had the power to allow a new point to be taken on an appeal case where it is clear that no further fact-finding is required and that no further evidence will be needed. The judges also said that they had power to do so even where further fact-finding was required and that they had power to admit further evidence if necessary. In this case there would be a need for HMRC to adduce further evidence in order to demonstrate how their systems comply with the legislation. However, the judges said “it will be much harder for an appellant to succeed in an application for permission to raise a new point of law if further findings of fact are required, the more so if further evidence is also required.”

The judges decided not to exercise their powers to allow the new point to be raised.

One of the reasons given for this refusal was that the new point was made at a late stage in the process – only a few days before the hearing. Additionally, the costs order in place for HMRC’s appeal

(preventing either side from recovering any costs of the appeal) did not extend to Mr Bosher’s cross-appeal and the judges were not minded to extend it to this. The judges said: “It is one thing to allow Mr Bosher to present arguments in support of the Tax Chamber’s decision on an appeal which HMRC were bringing to us and on which they would need to appear (whether or not Mr Bosher appeared at the hearing) without exposing himself to an adverse costs order; it is quite another to give him that same protection when it is he who is raising a new point and is not simply seeking to support a decision already given in his favour.” The judges also took into account the fact that HMRC would want to appeal any decision on the validity of penalty notices if they lost in the UT. Mr Bosher would be likely to seek further costs orders and if unsuccessful may decide not to participate in further appeals which the judges said would be “an objectively undesirable position”.

The judges noted that there are other cases going through the system where this point is being raised and where the relevant fact finding exercise can be carried out by the FTT and the judges considered that these were more suitable arenas to explore this new point.

CommentThe UT’s refusal to exercise its powers to allow a new point to be raised on appeal is not useful in clarifying whether the penalty notices themselves are valid. However, it does demonstrate the various practical factors that will be considered by the UT when deciding whether to allow a new point to be raised.

Read the decision

HMRC v Anthony Bosher FTC/3/2013

An application to raise a new point in an appeal to the Upper Tribunal was refused due to the late stage at which the point was raised and the costs position.

PM-Tax | Cases

Procedure (continued)


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http://www.tribunals.gov.uk/financeandtax/Documents/decisions/HMRC-v-Bosher-new-point.pdf

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PM-Tax | Cases

Procedure (continued)


Test Claimants in the Franked Investment Income Group Litigation v HMRC C 362/12

The fact that another remedy was available to taxpayers when the UK blocked tax claims based on mistake of law did not allow the closure of the more favourable route without notice.

The franked investment income (FII) GLO relates to a long-running dispute between the UK tax authorities and a number of UK-based multinational companies. In two earlier rulings, the CJEU found that the UK’s previous approach to the taxation of the dividends which UK-based multinational companies received from overseas subsidiaries was discriminatory.

EU law requires there to be an ‘effective’ remedy for monies paid in respect of tax that has been unlawfully charged. Aside from claims under statute, UK law offers two common law remedies: ‘DMG mistake of law claims’, under which companies can claim back tax wrongfully paid in mistake of law; and ‘Woolwich claims’, under which companies can reclaim tax unlawfully paid.

Previously, the six year limitation period for bringing DMG claims ran from the date that the mistake was discovered, or could reasonably have been discovered; while Woolwich claims had to be made within six years of the date that the tax was paid. DMG claims were therefore usually more favourable to the taxpayer from the point of view of time limits. However, the ability of a company to rely on this more favourable time limit was removed by section 320 of the 2004 Finance Act, which blocked DMG claims made on or after 8 September 2003. The change was introduced without a transitional period.

The taxpayer in the test case (Aegis) argued that the introduction of section 320 deprived it of the opportunity of making a claim which would otherwise have been made within the time-limits, thus rendering the exercise of the rights it derives under EU law excessively difficult or even impossible.

HMRC argued that EU law requires only that there be an effective remedy for enforcing rights under EU law. It said that the requirement was satisfied by the Woolwich cause of action and provided that such a remedy remains available, it is immaterial that section 320 curtailed the extended limitation period applicable to an alternative domestic remedy so as to bring it in line with the limitation period for the Woolwich cause of action.

The CJEU said that the UK was entitled to remove the more favourable time limit for bringing so-called ‘DMG mistake’ claims. However, by not including sufficiently adequate transitional arrangements in making the change, it “retroactively deprived some individuals of their right to repayment”.

“Whilst national legislation reducing the period within which repayment of sums collected in breach of EU law may be sought is not incompatible with the principle of effectiveness, it is subject to the condition not only that the new limitation period is reasonable but also that the new legislation includes transitional arrangements allowing an adequate period after the enactment of the legislation for lodging the claims for repayment which persons were entitled to submit under the previous legislation,” the court said in its judgment.

“The fact that... the taxpayer has two such remedies cannot, in circumstances such as those in issue before the referring court, lead to a different conclusion,” it said.

For similar reasons, the UK Government’s actions also infringed EU principles of legal certainty and the protection of legitimate expectations, it concluded. It did not matter that at the material time the availability of the more favourable route had been recognised only recently by a lower court and was not definitively confirmed by the highest judicial authority until later.

CommentThe judgment is good news for companies who previously made EU law based High Court claims for repayment of corporation tax with a view to relying on the longer time limit applicable to mistake based claims. However, the ruling is no great surprise since a majority in the Supreme Court and the Advocate General of the CJEU previously came to the same conclusion.

Read the decision

http://curia.europa.eu/juris/document/document.jsf?text=&docid=145536&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=361156

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PM-Tax | Cases

Eclipse 35 was a film partnership designed to provide income tax relief for individual high net worth investors. Eclipse 35 and its members entered into a complex set of transactions with members of the Disney group of companies in relation to the acquisition, distribution and marketing of film rights and with members of the Barclays group of companies in relation to the financing of the acquisition of the film rights.

In order for individual members of Eclipse 35 to claim tax relief for interest in respect of borrowings made to contribute to the capital of Eclipse 35, it had to be shown that Eclipse 35 was carrying on a trade and that the borrowed money used to contribute to Eclipse 35 was used wholly for the purposes of that trade.

The FTT decided that Eclipse 35 was not carrying on a trade and Eclipse 35 appealed.

Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 provides that whether a transaction or series of transactions constitutes trading is a question of fact for the FTT to decide and that an appeal from their decision can succeed only if they have misdirected themselves in law or if the only true and reasonable conclusion from the facts found by them is contrary to their determination. Mr Justice Sales dismissed Eclipse 35’s argument, relying on comments made by Lord Carnwath JSC in R (Jones) v First-tier Tribunal [2013] UKSC 19 that a “more intrusive standard of review is necessary” and that whether an issue was of fact or law depended upon whether “as a matter of policy one thinks it is a decision which an appellate body with jurisdiction limited to errors of law should be able to review” as stated in Lawson v Serco.

Sales J said the test of whether a person is carrying on a trade will necessarily be fact-sensitive and so the FTT should be the primary body making the judgment and the Upper Tribunal should intervene and find an error of law “only on the classic, more restricted basis laid down so clearly in Edwards v Bairstow”. He said that the fact that there have been film partnership cases before the FTT in which it has been found that the partnership carried on a trade and others in which it was found that it did not, does not justify adoption of a new, more intrusive approach to identifying whether a question of law arises.

The judge then dismissed Eclipse 35’s attempts to show that the only true and reasonable conclusion from the facts found by the FTT was contrary to their determination, finding for Eclipse 35 only on one technical point in relation to HMRC’s issue of a closure notice.

CommentThe case confirms the established position that whether or not activities amount to a trade is a question of fact to be decided by the FTT, which can be challenged by the UT only in limited circumstances.

Read the decision

Eclipse Film Partners (No. 35) LLP v HMRC [2013] UKUT 0639 (TCC)

Whether activities amount to trading is a question of fact to be determined by the FTT and is not an area where a new more intrusive approach should be taken to make it into a question of law which can be decided by the UT.

Substance

http://www.tribunals.gov.uk/financeandtax/Documents/decisions/Eclipse-Film-Partners-No35-LLP-v-HMRC.pdf

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Substance (continued)


McCarthy & Stone (Developments) Ltd and another v HMRC [2013] UKFTT 727 (TC)

A developer charging a capital contribution for the provision of communal furniture and fittings on the grant of residential leases for retirement flats was making a single zero rated supply and could recover input tax on the communal items.

McCarthy & Stone built and sold retirement flats from 1980 to 2009. It granted the first purchasers of the flats 125 year leases which would include use of communal areas such as a residents’ lounge. The communal areas would be furnished by McCarthy and under the contract of sale the purchaser would be required to pay a £500 sum “towards the communal fittings” in addition to the premium and rent and service charge under the lease.

The first supply of a residential dwelling is zero rated for VAT purposes and McCarthy argued that it was making a single zero rated supply and could recover the input tax on the furnishings for the communal areas. HMRC denied the input tax recovery and argued that McCarthy was making a single supply, which would normally be exempt. It argued that although zero rating takes precedence over exemption, zero rating must be interpreted narrowly and any part of the supply which was not part of the construction of a residential building could not be zero rated and remained exempt. HMRC said the supply of the furniture was exempt so that McCarthy could not reclaim input tax in respect of it.

The FTT considered the Card Protection Plan case on single or multiple supplies and decided that what was supplied was a single supply of the lease to which the features in respect of the communal areas were ancillary, being, for a typical customer, a way of better enjoying the principal service.

The FTT then considered the case of Talacre Beach Caravans which related to the supply of caravans and their removable contents. UK legislation provided for the zero rating of the supply of a static caravan but said that this did not include its removable contents. The ECJ held that because the UK legislation excluded removable contents from the zero rating, even if the supply of a caravan and its removable contents were a single supply on a proper application of the Card Protection Plan principles, that supply should be zero rated only to the extent of that part of it which was the supply of the caravan. HMRC argued that this supported their argument that the supply in respect of the communal areas was exempt. The FTT decided that the effect of the Talacre case was that they had to consider the purpose and effect of the zero rating provisions at the relevant times.

The FTT considered the VAT treatment of McCarthy’s housing supplies from 1980 to 1989, using the principles applying at that time. It decided that the supply of furniture was part of a single zero rated supply as “the right to use the furniture was incidental to, or integral with, the right to the land obtained by the purchaser.”

After this time the legislation was amended so that it is now only the premium paid for the grant of lease which is treated as a zero rated supply. The FTT found that, for this period, whilst the capital contribution was not described as a premium, it could be classified as a premium as it was part of the consideration for the grant of the lease and the lease should be read as incorporating an obligation on the landlord to provide and maintain the furnishings.

McCarthy’s appeal was allowed and it could reclaim input tax in relation to the communal furniture and fittings.

CommentThis decision was given almost a year ago but has only recently been published, despite being referred to in other cases.

Read the Decision

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http://www.financeandtaxtribunals.gov.uk/judgmentfiles/j7507/TC03104.pdf

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Robert Brown v HMRC [2013] UKFTT 740 (TC)

The fact that an investor whose motives were not entirely commercial was prepared to subscribe shares did not indicate that shares were not of negligible value for CGT purposes if a prudent purchaser would not be prepared to invest.

Mr Brown claimed income tax relief under section 574 ICTA 1988 in respect of a capital loss from shares in a qualifying trading company. The claim depended upon the shares in question having become of negligible value. HMRC refused the claim on the basis that the shares were not of negligible value.

For Mr Brown’s claim to be successful, the burden of proof was on him to show that the shares had negligible value at 5 April 2006. The FTT confirmed its agreement with the FTT decision of Barker, Harper & Wickes [2011] UKFTT 645 (TC) that negligible value “means ‘worth next to nothing’ but not ‘nil’” and must be determined by the market value of an arm’s length transaction. The FTT also confirmed that any events after 5 April 2006 were not relevant to the issue.

At the date of the claim the company had been in financial difficulty, with liabilities exceeding assets by £2 million. The only way it managed to continue to trade was as a result of cash injections provided by one of the directors by a series of equity purchases and loan investments. In the course of making an equity purchase just before the date of the claim, the shares had been offered to other purchasers, none of whom had elected to buy the shares. The FTT decided that the director’s purchase of the shares could not amount to an arm’s length involvement and as no other investor elected to purchase shares given the chance, this was indicative of the assets having a negligible market value.

The FTT allowed the appeal and agreed with Mr Brown that the shares had negligible value. It agreed that a prudent purchaser would not purchase the shares as they would have no dividend return as the company was making losses and no value to return as the company’s liabilities exceeded its assets. HMRC had attempted to argue that there may be some IP rights in the company which could give a ‘hope’ value to Mr Brown’s shares but the FTT rejected this argument as those IP rights had already been written off by a reputable accountancy firm in the company’s accounts.

Comment The FTT was at pains to highlight the importance of valuing assets according to what a prudent purchaser would take into account and not by reference to the value put on the shares by the taxpayer or by an investor not motivated entirely by commercial considerations.

Read the Decision

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Iveco Ltd v HMRC [2013] UKFTT 763 (TC)

Claims to recover overpaid VAT arising from a subsequent reduction in consideration in respect of periods before 1990 did not fall within section 80 VATA and were therefore not subject to a time limit.

Iveco is a distributer of commercial cars which made bonus payments to customers who purchased vehicles. The payments, despite being made a substantial time after the initial sale, had the effect of reducing the sale price of the vehicle. Iveco therefore submitted a VAT repayment claim to HMRC for the amount of VAT on the supply proportionate to the reduction in price.

The bonuses were paid in the period from 1 January 1978 to 31 December 1989. However, Iveco only made its claims on 9 November 2011 and so the preliminary issue before the FTT was whether the claims were either subject to the time limit in section 80(4) VATA or otherwise time barred.

The right to retrospectively reclaim tax where the price is reduced after the supply derives from article 11C(1) of the Sixth Directive. As a Directive, the UK is required to implement this article in domestic legislation. This did not happen however until 1 January 1990 when the regulation that was to become regulation 38 of the VAT Regulations 1995 came into force. On the same day the precursor to section 80 VATA also came into force.

HMRC said that section 80 applied as VAT accounted for in the period in which the bonus payment was made was not VAT due as it did not take account of the price reduction. Iveco argued that until 1 January 1990, there was no UK statutory mechanism to give effect to article 11C(1) of the Sixth Directive, and accordingly no method by which the VAT due in any accounting period could be adjusted. Iveco had the right to rely on the direct effect of article 11C(1), but exercised that right only when it claimed the repayment in November 2011.

Judge Berner agreed with Iveco. He said, “Absent appropriate implementation, of article 11C(1) in the UK, there was no domestic mechanism for adjustment that could operate to reduce the amount of output tax or VAT due. That was the case both before 1 January 1990, and equally so after that date, when although a mechanism for adjustment was introduced that could operate for future prescribed accounting periods, it could not do so for cases where the price reduction had taken effect before 1990.”

Having decided that the claim was not time barred by virtue of section 80(4) VATA, the FTT sought to give direct effect to Article 11C(1) by interpreting domestic legislation in conformity with Community law. The FTT looked to Regulation 38 of the VAT Regulations 1995 (which applied at the time of Iveco’s claim and was a restatement of the first regulations implementing article 11C(1) in 1990) to find a conforming interpretation. It found that the most effective way to do so was to remove the temporal restriction from those regulations entirely. The FTT therefore interpreted regulation 38 of the 1995 Regulations by not giving effect to regulation 38(5). As the FTT does not have policy making powers, it decided not impose any time restrictions of its own. The effect was to allow Iveco to make a claim for the overpaid VAT for the relevant period despite only making a claim in 2011. As the FTT had allowed Iveco a remedy in respect of its claim it decided not to consider whether a conforming interpretation could be possible in respect of section 80 VATA as it was not necessary.

Lastly, the FTT dismissed the challenge from HMRC as to its jurisdiction. The FTT found that section 83(1) VATA, which allows a power to determine the VAT chargeable on a supply “is capable of encompassing appeals on all questions relating to the chargeability of supplies of goods and services. It is wide enough to include such questions arising from the direct application of a VAT Directive”. Accordingly, the FTT decided that it acted within its powers in determining that direct effect can be given to article 11C(1) through a conforming construction of the VATA.

CommentThe decision is only relevant to claims in respect of periods before 1 January 1990. It does however contain useful comments on how UK legislation can be interpreted in conformity with EU law.

Read the Decision


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HMRC v Bridport and West Dorset Golf Club Limited C 495/12

The supply of services to non-members of a golf club in return for green fees is exempt from VAT and the UK legislation does not comply with EU law.

Bridport is a private golf club. Members pay an annual fee to use its facilities but non-members can also use the facilities by paying green fees. Bridport had initially treated the green fees from non members as standard rated and accounted for VAT. It subsequently changed its view and claimed a repayment of the VAT. HMRC refused the claim and Bridport appealed to the FTT, which allowed the appeal. HMRC appealed to the UT which referred several questions to the CJEU.

Article 132(1)(m) of Directive 2006/112 exempts from VAT the supply of “certain services closely linked to sport or physical education supplied by non-profit making organisations to persons taking part in sport or physical education”. Member States are permitted to impose certain restrictions on when the exemption applies, including that the exemption must not be likely to cause distortion of competition to the disadvantage of commercial enterprises subject to VAT. In addition Article 134 of Directive 2006/112 states that the exemption is not available if the basic purpose of the supply is to obtain additional income through transactions that are in direct competition with those of commercial enterprises that are subject to VAT.

In UK law, item 3 of Group 10 of Schedule 9 VATA 1994 carves out of the exemption supplies made to non-members where the body operates a membership scheme.

The CJEU decided that Article 134(b) Directive 2006/112 does not exclude from the exemption the grant, by a non-profit-making body managing a golf course and offering a membership scheme, of the right to use that golf course to visiting non-members. It pointed out that the exemption for supplies of services closely linked to sport in Article 132(1)(m) is not limited to supplies of services to members.

The CJEU said that as using the golf course was essential to playing golf, the supply to non-members was essential to the exempted transactions. Supplies to non-members could not be excluded from the exemption on the basis that they produced ‘additional income’, as the question of whether or not the exemption applied would then turn solely on the status of the recipient of the supply and Canterbury Hockey Club had decided that Member States have no power to exclude a certain group of recipients from the benefit of the exemption. Green fees paid for the use of a golf course by visiting non-members of a non-profit-making body also offering a membership scheme therefore do not constitute additional income within the meaning of Article 134(b) of Directive 2006/112.

Looking at the UK legislation the CJEU said that by making the exemption subject to conditions, Member States may not alter the scope of that exemption. Member States were not permitted to exclude from the exemption a supply of services consisting in the grant of the right to use the golf course managed by a non-profit-making body offering a membership scheme when that supply is provided to visiting non-members of that body. The UK rules do not therefore comply with EU law.

CommentThis is good news for golfers who should, hopefully, see a reduction in green fees when visiting non profit clubs. However there is no reason why the judgment is not equally applicable to the same type of fees raised by other non profit making sporting clubs. Any such clubs not having already made a claim should consider taking advice as to the merits of making such a claim. The case also provides some interesting comment on the applicability of fiscal neutrality generally and the requirement to set the situation in context when seeking to apply it.

Read the decision

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62012CJ0495:EN:HTML

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PM-Tax | Events

Queen Mary University of London International Tax Guest Lecture

Each year, the Centre for Commercial Law Studies, Queen Mary University of London organises a series of guest lectures given by leading International and EU Taxation experts. These speakers provide an insight into the latest developments in tax law with particular emphasis on what is happening in practice. The aim is to inspire and motivate the audience to ‘think outside the box’. The ultimate goal is to create an environment for an interactive, stimulating, exciting and educational conversation or even a debate between the lecturers and the attendees.

Heather Self, Tax Partner, Pinsent Masons, will explore some key treaty issues for developing countries seeking to attract foreign direct investment.

Professor Dr Hans van den Hurk, Maastricht University and Tax Partner, Deloitte, The Netherlands, will provide an insight into the meaning of responsible tax in this rapidly developing area of international tax law.

Date: 30 January 2014

Time : 1.30 – 5.00pm

Venue: Room 3.1, Centre for Commercial Law Studies, Queen Mary University of London, 67-69 Lincoln’s Inn Fields, London WC2A 3JB.

If you are interested in attending this free lecture, book here.

http://www.pinsentmasons.com/en/people/partnersconsultants/heather-self/

http://www.deloitte.com/view/nl_NL/nl/diensten/belastingadvies/fiscale-informatie/fiscale-expertisegroep/hans-vanden-hurk/

https://www.eventbrite.co.uk/e/international-tax-guest-lecture-tickets-9878143794

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PM-Tax | People

Pinsent Masons expands in Munich with launch of German tax practice

We are very pleased to announce that we have expanded our international tax practice following the appointment of Werner Geisselmeier as a partner in our Munich office.

Werner has thirty years experience encompassing tax litigation and compliance in addition to advice on tax elements of corporate transactions. Prior to private practice roles at Lovells and Sidley Austin, Werner held in-house positions at a major manufacturing business and a prominent international trading and service company, where he ultimately served as Chief Financial Officer for several years.

Pinsent Masons has one of the largest multidisciplinary Tax teams of any international law firm and has been growing that capability around the globe. Last year the firm appointed four tax specialists as part of the expansion of its Shanghai office, while in September 2013 the firm appointed Eugénie Berthet to its Paris team.

This is the firm’s first partner hire in Germany since the firm opened an office in Munich in 2012.

Head of our Munich office Ulrich Lohmann said:“Werner is a senior figure in the market and we are delighted that he has agreed to join us. The Munich office has been performing ahead of expectation since launch and there is clear client demand for advice on contentious and non-contentious tax matters. Werner will be an invaluable part of our growing practice.”

Jason Collins, Head of Tax, said:“Building on our position as the largest tax team in a UK law firm, we are making fantastic progress towards developing a truly international tax capability. Cross-border tax issues remain high on the agenda in boardrooms around the world and with the addition of exceptionally high-calibre lawyers like Werner and Eugénie we are uniquely well-placed to provide advice across a full range of tax matters.”

Werner Geisselmeier

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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

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